How the Two Federal Securities Laws Divide the Primary and Secondary Markets, and What the Exam Tests

The Securities Act of 1933 regulates the sale of new securities to the public, while the Securities Exchange Act of 1934 regulates the trading of securities after they are issued. The 1933 Act governs the primary market, and the 1934 Act governs the secondary market.

Put simply, the 1933 Act is about the paper, meaning the securities themselves and the disclosure that comes with them. The 1934 Act is about the people and places, meaning the exchanges, the broker-dealers and the companies whose shares trade every day.

This guide compares the two laws side by side, covering what each one requires, who it applies to, how they overlap, worked examples, the exam traps and five practice questions. For a deeper look at the first law on its own, FRC’s guide to the Securities Act of 1933 explained for finance graduates covers it in full.

Why Congress Passed Two Laws Instead of One

The stock market crash of 1929 wiped out billions of dollars of savings, and Congress found that many investors had bought securities with little or no reliable information. Companies issued shares backed by misleading promises, and trading on the exchanges was riddled with manipulation.

Congress tackled the problem in two stages. The 1933 Act came first and dealt with the moment a security is sold to the public, forcing issuers to tell the truth about what they were selling.

The 1934 Act followed a year later and dealt with everything that happens next. It created the Securities and Exchange Commission to enforce both laws and brought the exchanges, the brokers and the ongoing reporting of public companies under federal control.

Where This Topic Appears on the Exams

The federal securities laws appear in the laws and regulations section of the Series 65, where questions test which act covers which activity. They are also tested on the SIE and the Series 7, often as a straight question about which law created the SEC or which law requires a prospectus.

FRC’s Series 65 Exam Preparation course covers the federal securities laws alongside the state rules in the Uniform Securities Act, and the exam requires no sponsor. The SIE Examination Preparation course introduces both acts, and the Series 7 Exam Preparation course applies them to new issues, trading and customer accounts.

Every FRC course can be spread across interest-free monthly payments, so cost is no reason to delay. The two acts are easy to confuse, so learning a clear dividing line between them is worth marks on every one of these exams.

The Securities Act of 1933: What It Requires

The 1933 Act is often called the truth in securities act. Its central rule is that a security offered to the public must be registered with the SEC unless an exemption applies.

Registration means the issuer files a registration statement containing detailed information about its business, finances, management and the securities being offered. Investors must receive a prospectus, which is the part of the registration statement written for them.

The SEC does not approve or judge the merits of a security. It checks that the required disclosure has been made, and any statement suggesting SEC approval is itself a violation.

The Registration Process Under the 1933 Act

After the registration statement is filed, a cooling-off period of at least 20 days begins. During this period, the securities cannot be sold, but the underwriters can take indications of interest from investors.

A preliminary prospectus, known as a red herring, can be circulated during the cooling-off period. It contains most of the final information but leaves out the final offering price and the effective date.

Once the registration becomes effective, the securities can be sold and the final prospectus delivered. This process is what turns a private company into a public one through an initial public offering.

Exemptions Under the 1933 Act

The 1933 Act separates exempt securities from exempt transactions. Exempt securities never need registration, and they include US government securities, municipal securities, bank securities, commercial paper with a maturity of 270 days or less, securities of nonprofit organisations and insurance policies such as fixed annuities.

Exempt transactions are sales of securities that would normally need registration but are made in a way that does not involve a public offering. The best-known examples are private placements under Regulation D, intrastate offerings under Rule 147 and smaller offerings under Regulation A.

FRC’s guide to Regulation D Rule 504 vs Rule 506 explains the private placement exemptions in detail. Resales of restricted and control securities are another exempt transaction, covered by Rule 144.

Liability Under the 1933 Act

The 1933 Act gives investors the right to sue when a registration statement or prospectus contains a material misstatement or omission. Section 11 covers the registration statement, and the issuer is liable for its accuracy, while directors, underwriters and experts who signed or certified it can also be liable.

Section 12 allows a buyer to recover from the seller when securities are sold without required registration or through a misleading prospectus or oral statement. Section 17(a) prohibits fraud in the offer or sale of any security.

That antifraud rule applies even to exempt securities. An exemption from registration is never an exemption from the duty to tell the truth.

The Securities Exchange Act of 1934: What It Requires

The 1934 Act is much broader. It created the SEC and gave it authority over the whole secondary market, including the exchanges, the over-the-counter market and the firms that trade in it.

National securities exchanges must register with the SEC and follow its rules. Broker-dealers must register too, using Form BD, and are subject to SEC rules on net capital, customer protection and record keeping.

The act also allows self-regulatory organisations to oversee their members. Today the main one is FINRA, which registers and supervises broker-dealers and their representatives under SEC oversight.

Reporting by Public Companies Under the 1934 Act

Once a company’s securities are registered under the 1934 Act, it must file regular reports with the SEC. The main ones are the annual report on Form 10-K, the quarterly report on Form 10-Q and current reports on Form 8-K for significant events.

The act also governs proxy solicitations, so shareholders receive the information they need before voting at company meetings. A proxy statement must disclose the items to be voted on and any conflicts involved.

Tender offers are covered too, through amendments known as the Williams Act. Anyone acquiring more than 5% of a company’s registered voting shares must file a beneficial ownership report with the SEC, giving the market notice that a significant stake is being built.

Trading Conduct Under the 1934 Act

The 1934 Act contains the main federal rules against market manipulation and fraud in trading. Section 10(b) and Rule 10b-5 prohibit fraud in connection with the purchase or sale of any security, and they are the foundation of US insider trading law.

Section 16 requires officers, directors and holders of more than 10% of a company’s shares to report their trades. They must also give back any profit made from buying and selling, or selling and buying, the company’s shares within six months.

The act also gives the Federal Reserve authority over credit used to buy securities. The Fed exercises it through Regulation T, which sets the initial margin requirement, currently 50% for most stock purchases.

Side-by-Side Comparison

How the Two Acts Work Together

A company’s life in the public markets touches both laws. The 1933 Act governs its initial public offering, and from the day its shares start trading, the 1934 Act governs its reporting, its insiders and the market for its shares.

The broker-dealers involved are covered by both. When they underwrite an offering, they must follow the 1933 Act’s rules on registration and the prospectus, and when they trade for customers afterwards, they must follow the 1934 Act’s rules on conduct and capital.

Investors also benefit from both. The 1933 Act gives them full information when they buy a new issue, and the 1934 Act keeps that information current for as long as they hold the shares.

How Later Laws Built on the Two Acts

The 1933 and 1934 Acts are the foundation that later securities laws built on. The Investment Company Act of 1940 and the Investment Advisers Act of 1940 extended federal oversight to funds and advisers.

The Sarbanes-Oxley Act of 2002 tightened the 1934 Act’s reporting regime after major accounting scandals, adding certifications by chief executives and finance directors. The Dodd-Frank Act followed the 2008 financial crisis with further changes to market oversight.

For Series 65 candidates, the state layer is tested too. The Uniform Securities Act gives states their own registration and antifraud rules, and questions often test where federal law ends and state law begins.

Worked Example: A Company Going Public

A technology company decides to raise $200 million by selling shares to the public for the first time. It files a registration statement with the SEC under the 1933 Act, starting a cooling-off period of at least 20 days.

During that period, its underwriters circulate a red herring and collect indications of interest, but no shares are sold. Once the registration becomes effective, the shares are priced, sold and delivered with a final prospectus.

The next morning, the shares start trading on an exchange. From that point, the 1934 Act takes over, and the company must file its 10-Q at the end of the quarter and its 10-K at the end of the year.

Worked Example: An Insider Selling Shares

A director of the same company buys 10,000 shares at $40 in March and sells them at $55 in July. Because the purchase and sale took place within six months, Section 16 of the 1934 Act requires the director to give the $150,000 profit back to the company.

It does not matter whether the director used inside information. Section 16 applies automatically to short-swing profits, regardless of intent.

If the director had also traded on material nonpublic information, Rule 10b-5 would apply as well. That would expose the director to enforcement action, civil penalties and possibly criminal charges.

Worked Example: A Private Placement

A start-up wants to raise $5 million from a small group of wealthy investors without a public offering. It relies on Rule 506(b) of Regulation D, an exempt transaction under the 1933 Act, and files a short notice with the SEC.

The securities it sells are restricted, so buyers cannot freely resell them. Resales must follow Rule 144 or another exemption, and FRC’s guide to control stock vs restricted stock under Rule 144 explains how that works.

Even though no registration is required, the 1933 Act’s antifraud rule still applies. If the start-up misleads its investors, it can be sued and pursued by the SEC.

The Exam Traps

The first trap is mixing up which act created the SEC. The answer is the 1934 Act, even though the 1933 Act came first and was originally enforced by the Federal Trade Commission.

The second trap is believing an exempt security is exempt from everything. Exempt securities do not need registration, but the antifraud provisions of both acts still apply.

The third trap is thinking the SEC approves securities. It reviews disclosure only, and any claim of SEC approval is a violation. The fourth trap is assigning the margin rules to the SEC, when the 1934 Act gives that authority to the Federal Reserve through Regulation T.

FRC’s guide to Series 65 ethics and laws questions and exam traps covers more traps in this area. For the full list, see FRC’s guide to Series 65 exam traps and common mistakes.

A Memory Aid

Remember “33 is the paper, 34 is the people and places.” The 1933 Act covers the securities being sold, and the 1934 Act covers the exchanges, brokers and companies that keep trading them.

For the SEC, remember “34 made the cops.” The commission that enforces both laws was created by the 1934 Act.

Practice Questions

Question one: which act requires a prospectus to be delivered to buyers of a new issue? The Securities Act of 1933.

Question two: which act created the Securities and Exchange Commission? The Securities Exchange Act of 1934.

Question three: a public company files its quarterly report on Form 10-Q. Under which act? The Securities Exchange Act of 1934.

Question four: commercial paper with a maturity of 180 days is sold without registration. Is it exempt from the antifraud provisions? No, exempt securities remain subject to antifraud rules.

Question five: who sets the initial margin requirement for stock purchases under the 1934 Act? The Federal Reserve, through Regulation T.

Related Questions

The 1934 Act’s antifraud rule is one of the most tested provisions on every securities exam. FRC’s guide to what Rule 10b-5 is explains its elements, the insider trading theories built on it and how it compares with the 1933 Act’s Section 17(a).

Get Exam-Ready

Questions on the federal securities laws reward candidates who can place each rule in the right act. Once the dividing line between the primary and secondary markets is clear, these questions become some of the most dependable marks on the exam.

The FRC dictionary is more than a dictionary. It is a library of explainer videos, written explanations and on-page quizzes covering the FINRA and SEC rules you are tested on, so you can open any term and go deeper whenever a question catches you out.

Study With FRC

FRC’s programs and memberships are open to everyone. Whether you are preparing for the Series 65, the SIE, the Series 7 or a combination, structured exam preparation turns topics like the federal securities laws into marks you can rely on.

FRC’s Professional Membership adds verified progress and a Digital Profile, so when you apply for roles, employers can see your exam progress and the knowledge you are building, not just read about it on a resume.

Your Next Step

The Securities Act of 1933 regulates new issues, requiring registration and a prospectus unless an exemption applies. The Securities Exchange Act of 1934 created the SEC and regulates the secondary market, including exchanges, broker-dealers, public company reporting, insiders and margin.

Remember “33 is the paper, 34 is the people and places,” and you will be ready for every version of this question the exam can ask.