Series 65: Fraud And The 1933 And 1934 Acts

Fraud and the 1933 and 1934 Acts

The 1933 and 1934 Acts also contain several rules that address fraudulent activity, as summarized in the list that follows. These prohibitions apply to the issuing, selling, offering, and trading of securities.

• • It is unlawful to use any “manipulative or deceptive” device when offering or selling a security. This encompasses knowingly making untrue and misleading statements and omissions of material facts. Even those who may not be intending to deceive another can be in violation of antifraud rules if they fail to correct a statement they had reasonable grounds to believe was misleading.

Example: An adviser recommends that a client buy Illinois municipal bonds, but doesn’t disclose that Illinois’ public retirement fund is not covering costs and is increasingly underfunded. As a result, municipal bondholders are not aware of the risk that Illinois may not be able to pay both retirees and bondholders and that they may have to compete for the same limited funds. Failing to disclose the