In the primary market, issuers sell new securities to investors and receive the proceeds; in the secondary market, investors trade existing securities among themselves and the issuer receives nothing.
An IPO is the first primary-market sale of a company’s stock to the public; later primary sales are follow-on (additional public) offerings. Once issued, shares change hands in the secondary market — on exchanges, over the counter, in the third market, or institution-to-institution in the fourth market, often through dark pools.
The Securities and Exchange Commission — the U.S. government agency, created by the Securities Exchange Act of 1934, that regulates the securities markets, enforces the federal securities laws, and oversees the SROs.
The SEC administers the Securities Act of 1933, the Exchange Act of 1934, the Investment Company Act of 1940, and the Investment Advisers Act of 1940. SEC registration of a security means required disclosures were filed — it is never an endorsement of the investment’s merits, and claiming otherwise is a violation.
Self-regulatory organizations are industry bodies that regulate their own members under SEC oversight; FINRA is the SRO for broker-dealers, while the MSRB writes rules for the municipal securities market.
The SIE loves the “who actually does X?” swap. The classic item gives you a function and four regulators: the tell is whether the body writes rules or enforces them. The MSRB drafts municipal rules, but enforcement falls to FINRA for non-bank dealers and the bank regulators (Fed, FDIC, OCC) for bank dealers — with the SEC overseeing all of it — so pick the enforcer, not the author. A related pattern asks which entity sits above the SROs: the answer is always the SEC, the federal agency that approves SRO rule changes; the SROs are self-regulators answerable to it.
The trap students fall into is treating “regulator” and “SRO” as interchangeable — the SEC and state regulators are government, while FINRA, the NYSE, and Cboe are private SROs. Don’t confuse this with the broker-dealer-vs-adviser split (a who-you-are question) or with market makers (a what-you-do trading role). Memory hook: SROs make the rules; the SEC rules the rule-makers.
A broker-dealer effects securities transactions — as broker (agent) for customers or dealer (principal) for its own account — and is paid by commissions and markups; an investment adviser is paid fees for giving investment advice.
Expect a vignette describing how a firm gets paid or where it registers, then asking which label fits. Beyond compensation, the hinge is registration venue: broker-dealers register with the SEC (Securities Exchange Act of 1934) and almost always must join FINRA, while investment advisers split by size — those with roughly $100 million or more in assets register with the SEC, and smaller “mid-sized” advisers register with the states (coordinated through NASAA). Another tested wrinkle: a broker-dealer can give advice without registering as an adviser if that advice is “solely incidental” to brokerage and carries no special compensation.
The classic trap confuses a market maker — a dealer acting as principal, earning the bid-ask spread — with an adviser. A market maker is a type of broker-dealer, never an adviser. Don’t confuse either firm with FINRA or the SEC, which regulate market participants rather than transact for customers. Many firms, of course, register as both broker-dealer and adviser.
Dealers that stand ready to buy and sell a security for their own account on a continuous basis, quoting a firm bid and ask price and providing liquidity to the market.
The SIE tests this with a capacity question: a firm trading from its own inventory and charging a markup/markdown (not a commission) answers dealer/principal, never agent. The same firm can be dually capable — selling stock it owns makes it a dealer (market maker), while merely arranging a trade between two clients for a commission makes it a broker (agent) — but it cannot do both on the same trade. Watch for the words inventory or spread: both point to a market maker.
Don’t confuse this with the broker-dealer-vs-adviser line — advisers charge fees for advice; market makers quote prices, they don’t advise. Another trap: market makers work the secondary market (existing shares), not the primary market where the issuer gets the proceeds. And note the oversight point — neither the SEC nor FINRA sets or guarantees a quote’s price; market forces do that. Their rules only make a displayed quote firm (no backing away). Hook: maker = inventory, spread, principal.
The arrangements by which investment banks bring new issues to market: in a firm-commitment underwriting the bank buys the entire issue and resells it (acting as principal); in a best-efforts deal it sells what it can as agent, with no purchase obligation.
The exam loves the “who eats the unsold shares” question. The tell is a scenario where an issue is undersubscribed: in a firm commitment the underwriter is acting as principal, so it owns the leftover inventory; in best efforts it acts as agent, so the issuer is simply left with unsold securities. A common trap pairs firm commitment with the wrong capacity — remember underwriter-as-principal means it bought the shares first. Expect questions distinguishing the best-efforts variants: in all-or-none and mini-max, investor funds sit in escrow until the contingency is met, and are returned if it fails.
Don’t confuse the commitment (the underwriter’s risk arrangement) with the primary-market transaction itself, where the issuer receives the proceeds, or with the prospectus that must accompany the sale — those are separate testable layers. Also keep standby (backstops a rights offering) distinct from a Reg D private placement, which skips public underwriting and registration entirely. Hook: firm = the firm is on the hook.
Under the Securities Act of 1933, a new issue must be registered with the SEC and sold with a prospectus — the disclosure document, drawn from the registration statement, that gives investors the material facts about the issuer and the offering.
The exam loves a three-period timeline: pre-filing (no offers or sales of any kind), the cooling-off period (offers allowed via the red herring, but no sales and no money may change hands), and post-effective (sales close with a final prospectus). Watch the tell — a question describing an activity “after filing but before the effective date” is testing the cooling-off rules. A favorite trap is the access-equals-delivery rule: once the final prospectus is filed on EDGAR, that satisfies the delivery requirement, so reps need not physically mail it (some older banks still describe paper delivery).
Don’t confuse the players or the laws. Registration lives under the Securities Act of 1933 (the “Paper Act”), while the SEC itself was created by the 1934 Act — and the SEC clears a filing for effectiveness without endorsing it. Underwriting commitments describe how the issue is sold; the prospectus describes what is disclosed. And remember the flip side: exempt securities and Reg D placements skip registration entirely, so no statutory prospectus is required at all.
Offerings excused from SEC registration: Regulation D private placements sold mainly to accredited investors, intrastate offerings under Rule 147, small offerings under Regulation A, and exempt securities such as Treasuries and municipals.
The exam’s favorite move is to separate an exempt security (always excused — Treasuries, munis, bank issues) from an exempt transaction (a particular sale is excused, but the security could still be sold publicly later). The classic trap: students assume an exemption means “no rules at all,” yet antifraud provisions always apply, and under Reg D the issuer must still file Form D with the SEC within 15 days of the first sale. Watch for Rule 506(c) stems that allow advertising — the tell is that the issuer must take reasonable steps to verify accredited status, not just take the buyer’s word.
Don’t confuse the exemption families: Rule 147 is the intrastate exemption (issuer and all purchasers in one state); Regulation A is a “mini-registration” with Tier 1 up to $20 million and Tier 2 up to $75 million in 12 months. Contrast this with prospectus-and-registration: a registered IPO needs a final prospectus and cooling-off period, while a private placement needs neither — and the SEC still neither approves nor guarantees either one. Hook: D for Discreet deals, A for Advertised mini-IPOs.