To qualify and work as a financial professional in the United States, one must take and pass at least two exams to be what is called a “registered representative”, which means exactly what you’d think: a representative (in this case of a client’s finances) who is registered (in this case with FINRA for the most part, but basically a regulatory organization of some type). These regulations exist to keep financial professionals accountable so that clients can invest with more confidence, which makes the broader market better for everyone: when entering a securities market, one knows that one is dealing with informed investors on a level playing field (to an extent, of course).
It is also good for the registered representative: financial professionals, whether working at a broker-dealer, in an investment bank, at a hedge fund, mutual fund, or as a wealth manager, has clear rules of what can and cannot be done so that, if she works in accordance with them, she won’t lose her job or go to jail. And by having clear rules and providing continuing education, there is greater security for the workers, investors, and companies in the financial industry.
While the financial industry has its faults like any other, this system has worked surprisingly well for a very long time given that the backbones of all of this regulatory infrastructure is based on laws that are nearly a century old.
The start of the comprehensive regulation of financial markets began in 1933 with the Securities Act of that year, and the year should not surprise you. The stock market crash of 1929 is world famous, and it forced the U.S. government to act decisively to ensure that the Great Depression that followed would never happen again—and, so far, it hasn’t. It took four years because that original crash extended throughout 1930 and 1931 despite legislators’ initial thinking that it wouldn’t spread. It did, causing bank panics for years, ending in January 1933.
Thus the Securities Act of 1933 had a painful birth, but it yielded the strongest financial system on Earth. It began with requiring the fair and full disclosure of all material information about a new stock—basically ensuring that investors knew what they were getting into when a stock went IPO. Those rules are still in effect today, and the primary issuance of any stock or non-government bond must follow the rules of that act.
The following year, legislators passed the Securities Exchange Act of 1934, which established the Securities and Exchange Commission that we all know and love today, while also creating rules for so-called Over the Counter (OTC) exchanges—nowadays NASDAQ is the biggest—and NYSE, which predates these rules by about three hundred years. That act regulated the trading of stocks in the secondary market, putting rules in place for buying stocks on margin (the main cause of the ’29 crash) as well as the regulation and registration of dealers—the rules behind the two exams I discussed above. Other famous rules about insider trading, managing customer accounts, and what activities are acceptable were also part of this rule.
Other rules followed—the Trust Indenture Act (TIA) put down clearer rules for corporate and municipal bonds, again still in effect today. The Investment Company Act of 1940 set down rules for REITs, mutual funds, and other investment vehicles designed to provide investors a one-stop-shop for diversifying investments with limited risk. As the lower risk promise and the insertion of a fund manager are themselves vectors for risk, specific legislation for them is obviously needed and important.
These acts created an alphabet soup of regulators—FINRA, which regulates the member firms that themselves operate as brokers, dealers, agents, and representatives of investors. The MSRB manages municipal bonds and hands over suspicious cases to FINRA to adjudicate. Other smaller self-regulatory organizations and government-led groups exist to keep a watchful eye on financial trasnactions—there’s NASAA (not to be confused with their much more exciting space-faring counterpart), the beloved IRS, the NFA, the CFTC, and so on.
Do you need to know about these groups and their sometimes byzantine rules to work in the financial sector? Yes. Even if you never touch a municipal bond, as most in the industry don’t, you still need to know how they are issued, who issues them, and what their tax treatment is. These details are tested on the Securities industry Essential (SIE) exam and in more detail in the Series 7 exam. Those aren’t the end of it—there are many more optional exams for different specialists (a list is here) with all ultimately designed to help registered representatives be better at their jobs. If you want to work in the industry, a good first step is to take the SIE by yourself. It’s not too expensive, at just $80, and a lot of study materials are available on the internet for free. Passing that exam demonstrates a serious commitment to working in finance, and financial firms notice applicants who have taken that exam by themselves