Stockbroker fraud laws are referred to as securities fraud laws. The Securities Exchange Act of 1934 contains the laws that govern the entire securities industry. Sections 9 and 10 of the act cover anti-fraud laws for stockbrokers and brokerage houses. Individual states have additional securities laws, which those in the industry commonly refer to as Blue Sky Laws. Other major stockbroker fraud laws include the Investment Company Act and the Investment Advisers Act. Deceptive Practices Section 10b and Rule 10b-5 cover the anti-fraud provisions of the act regarding the marketing and selling or trading of securities. This section prohibits any brokerage or broker/dealer from using deceptive practices at any time during the sale or trade securities. Brokerages and broker/dealers must reveal all public material information regarding the sale of a security to investors. This anti-fraud provision also prohibits broker/dealers from participating in insider trading practices by revealing non-public material information to potential investors Stock Price and Market Manipulation Section 9 of the Securities Exchange Act covers fraud laws regarding stock market and stock price manipulation. This section of the act prohibits brokerages and broker/dealers from providing false or misleading information regarding securities prices. Section 9 prohibits broker/dealers from falsely speculating that the price of a security will rise or fall due to market conditions in order to procure a sale, trade or in an effort to fix the price or falsely stabilize securities prices. Investment Company Act The Investment Company Act regulates all companies that trade securities. To prevent securities fraud, this act requires investment companies and their employees to divulge the company’s financial information and its investment policies and objectives to its clients. While the SEC regulates this law, it only pertains to disclosure of information. It does not pertain to outcomes of investment decisions or the tangible or intangible value of the investments made by the company and its employees. Investment Advisers Act The Investment Advisers Act pertains to securities dealers and stockbrokers that manage assets of $25 million or more and/or work with an SEC-registered company. The act requires that all persons receiving compensation for giving advice about securities must register with the SEC. In order to help prevent securities fraud, the act requires securities dealers to give full disclosure regarding advertising practices, fee schedules and record-keeping practices. Securities dealer/brokers must also provide disclosure regarding authority over clients’ funds and their compensation basis. Blue Sky Laws Blue Sky Laws are securities laws as they pertain to each state. The intricate details of these laws vary by state. Generally, Blue Sky Laws help prevent stockbroker fraud by requiring broker/dealers to register each security they are selling with a state’s securities commission. Any company or person in the business of selling securities must also register with a state’s securities commission. Under Blue Sky Laws, investment companies must also disclose corporate financial information and advertising practices.
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