The Other Regulators and Agencies

The SEC sits at the top of the securities industry, and the SROs sit under it. Five other bodies touch the business too. The exam names a job or a dollar limit and asks you which body owns it. Learn these five and those questions become free points.

The Department of the Treasury and the IRS

The Department of the Treasury is the cabinet department that manages the federal government's money. Treasury issues the debt the government sells: Treasury bills, notes, and bonds. When your customer buys a Treasury bond, Treasury is the issuer.

The Internal Revenue Service (IRS) is the bureau inside Treasury that collects federal taxes. The IRS writes the tax rules that decide how your customer's interest, dividends, and capital gains are taxed. It also sets the contribution and withdrawal rules for retirement accounts.

The exam likes to swap Treasury and the Federal Reserve. Treasury issues Treasury securities. The Federal Reserve buys and sells them in the market. The issuer and the buyer are different bodies.

Two more Treasury units reach the securities business: FinCEN, which runs the anti-money laundering reporting system, and OFAC, which publishes the US sanctions list. Both sit inside Treasury.

State regulators and NASAA

Every state has its own securities regulator, usually called the state securities administrator. The securities laws of a single state are called blue-sky laws. A state administrator registers firms and people, investigates fraud, and can bar someone from doing business in that state.

The North American Securities Administrators Association (NASAA) is the membership body for those state administrators. NASAA is not a government agency, and it enforces nothing. It writes model rules that states may adopt, and it develops the state license exams, such as the Series 63.

Size decides who registers an investment adviser. An adviser with $110 million or more under management must register with the SEC. An adviser with $100 to $110 million may choose the SEC or the states. Below $100 million, an adviser generally registers with the states where it does business.

NASAA itself regulates nobody; its member state regulators do. The exam tests this.

The Federal Reserve

The Federal Reserve is the central bank of the United States. It has a Board of Governors in Washington and 12 district Reserve Banks. Its Federal Open Market Committee (FOMC) sets monetary policy, mostly by buying and selling Treasury securities to steer short-term interest rates. The Federal Reserve also supervises banks and runs national payment systems.

One Federal Reserve rule lands straight on your desk. Regulation T limits the credit a broker-dealer may extend to a customer who buys securities. Regulation T sets the initial margin requirement at 50% of the purchase price.

The exam tests the source of that rule, not the math. Regulation T comes from the Federal Reserve, not from FINRA and not from the SEC.

SIPC

The Securities Investor Protection Corporation (SIPC) is a non-profit corporation that Congress created under the Securities Investor Protection Act of 1970. SIPC is not a government agency and not a regulator. It writes no conduct rules and disciplines nobody. Almost every broker-dealer registered with the SEC must be a SIPC member.

SIPC does one job. When a SIPC-member broker-dealer fails and customer assets are missing, SIPC works to restore the cash and securities that sat in the accounts.

The limit is $500,000 per customer, and no more than $250,000 of that may be cash. Take a customer with $200,000 of securities and $350,000 of cash at a failed firm. SIPC covers the securities in full, plus $250,000 of the cash, for $450,000. The remaining $100,000 of cash becomes a claim in the liquidation.

SIPC does not cover:

• A fall in the market value of the securities.
• Losses from bad advice or an unsuitable recommendation.
• Commodity futures contracts and foreign exchange trades.
• Fixed annuities and investment contracts, such as limited partnerships, that are not registered with the SEC.

Money market mutual funds count as securities for SIPC, not as cash.

The exam loves this trap: SIPC never makes up a market loss. If a customer's stock falls to zero while the firm is healthy, SIPC pays nothing.

The FDIC

The Federal Deposit Insurance Corporation (FDIC) is an independent federal agency that insures deposits at banks and savings associations. Coverage is automatic when a customer opens a deposit account, and the full faith and credit of the US government stands behind it.

The limit is $250,000 per depositor, per insured bank, per ownership category. That last phrase is why one person can hold more than $250,000 of coverage at one bank. A single account and a joint account at the same bank are insured separately.

The FDIC covers deposits: checking accounts, savings accounts, money market deposit accounts, and CDs. It covers no investments, even when the customer buys them at an insured bank. Mutual funds, annuities, stocks, and bonds get nothing from the FDIC.

How this gets tested

Most items here give you a job and ask for the body. Sort them this way:

• Issues Treasury securities and collects taxes: Treasury and its IRS.
• Registers firms under blue-sky laws: the state administrators, coordinated by NASAA.
• Sets monetary policy and writes Regulation T: the Federal Reserve.
• Restores missing cash and securities when a broker-dealer fails: SIPC.
• Insures deposits when a bank fails: the FDIC.

The favorite item is the SIPC versus FDIC swap. Read the question for the institution that failed. A failed broker-dealer points to SIPC and $500,000. A failed bank points to the FDIC and $250,000. Neither one pays for a bad investment.