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The Six SEC Rules Every Investor Should Know
Any investment has an element of risk. Even the best idea can go wrong due to unforeseen circumstances. However, as an investor or potential investor in the markets, you are entitled to protection from the risk of fraudulent and unfair practices.
Modern protections date back to 1934 when the federal government established the Securities and Exchange Commission. It was a reaction to the stock market crash of 1929 that led to the great depression. Since then, laws have evolved and regulations have been added to reduce the risk of bad actors and negligence.
The SEC is charged with maintaining fair and transparent financial markets and ensuring that companies comply with securities laws to protect investors. Over the years, its authority and responsibilities have expanded to address the evolving complexities of the financial markets.
While there are extensive regulations, six are especially important for the individual investor to know about. Each of these SEC rules contributes to a more fair and transparent market that allows you to make informed decisions.
- Rule 10b-5
Prevents insider trading and protects investors by maintaining market fairness. If insiders could trade based on non-public information, the average investor would always be at a disadvantage.
- Regulation D (Reg D): Private Placements Rules
Protects investors by ensuring that companies disclose enough information for investors to make informed decisions.
- (Reg BI) Best Interest Regulation
Requires brokers to act in the best interest of their clients, rather than recommending investments that earn the broker higher commissions. This ensures that brokers prioritize their clients’ needs.
- Securities Act of 1933 and 1934
Requires companies to provide financial and other significant information about securities being offered for public sale. They also prohibit deceit, misrepresentations, and other fraud in the sale of securities.
- Rule 144
Regulates how and when securities can be sold. This rule is particularly relevant for investors in startups or other private companies that may go public. It helps prevent market manipulation through large, sudden sales of stock.
- Regulation Fair Disclosure (Reg FD)
Prohibits selective disclosure by public companies to market professionals and shareholders. This helps create a level playing field by ensuring all investors have access to material information at the same time.