Antifraud, Competition, and Recordkeeping for New Issues
Quick Answer
Four rules frame broker-dealer conduct around new issues. Securities Act Section 2(b) forces the SEC to weigh efficiency, competition, and capital formation. Section 17 applies antifraud liability to every securities transaction, even exempt ones. SEA Rule 10b-3 bars BD-specific manipulative devices, and Rule 17a-3 requires detailed records with customer account delivery at 30 days and every 36 months.
The previous sections covered how new issues come to market and which securities are exempt from registration. This section covers the background rules that apply to all of it: the SEC's competition mandate, the two antifraud provisions, and the broker-dealer (BD) recordkeeping requirements that create an audit trail.
What does Securities Act Section 2(b) require the SEC to consider?
Securities Act (SA) Section 2(b) imposes a balancing test on the SEC.
When the SEC is making rules or deciding whether an action is "necessary or appropriate in the public interest," Section 2(b) requires the SEC to also consider:
- Efficiency of the markets
- Competition among market participants
- Capital formation
This is why the SEC periodically relaxes exemptions like Regulation D (Reg D) or adopts accommodations like Rule 147A: Section 2(b) tells the agency it cannot focus only on investor protection. The SEC must weigh whether a proposed rule makes capital harder to raise.
Think of it this way: Section 2(b) is why Reg D exists at all. Small businesses cannot afford a full registration process, and Section 2(b) forces the SEC to carve out private-placement pathways that keep capital flowing to them.
What does Securities Act Section 17 prohibit?
SA Section 17 is the Securities Act's general antifraud provision. It prohibits the use of interstate commerce or the mails to:
- Employ any device, scheme, or artifice to defraud
- Obtain money or property by means of an untrue statement of a material fact or a material omission
- Engage in any transaction, practice, or course of business that operates as a fraud or deceit
Scope: Applies to ALL Securities Transactions
Section 17 applies to every securities transaction, including:
- Registered offerings
- Section 3 exempt securities (government, municipal, commercial paper, nonprofit)
- Reg D private placements
- Intrastate offerings under Rule 147/147A
Section 17 does not care whether the security is registered. It cares whether there was fraud.
Scienter Standards
- Section 17(a)(1) (the "device, scheme, or artifice" clause): requires scienter (intent or recklessness). This is the criminal-liability track.
- Sections 17(a)(2) and 17(a)(3): can reach negligent conduct. Scienter is not required.
Exam Tip: Gotchas
- Section 17 applies to fraud in ANY securities transaction, including exempt securities and private placements. "Exempt from registration" is not "exempt from antifraud." A material misstatement in a commercial paper offering is still actionable under Section 17.
What does SEA Rule 10b-3 prohibit broker-dealers from doing?
Securities Exchange Act (SEA) Rule 10b-3 is the BD-specific antifraud rule.
- Prohibits a broker or dealer from using any manipulative, deceptive, or other fraudulent device in contravention of SEC rules that are "necessary or appropriate in the public interest or for the protection of investors"
- Operates as the BD parallel to SA Section 17 and the general antifraud rule SEA Rule 10b-5
- Focuses specifically on BD conduct, whereas Section 17 covers any transaction participant
Exam Tip: Gotchas
- Do not confuse the three "10b" rules. Rule 10b-3 = broker-dealer antifraud. Rule 10b-5 = general antifraud under Section 10(b). Rule 10b-10 = confirmation delivery (covered in the Customer Records unit). Different rules, different purposes.
What records must broker-dealers create under SEA Rule 17a-3?
SEA Rule 17a-3 requires BDs to create and maintain detailed records of their business activities. It is the "make" side of BD recordkeeping. Rule 17a-4 (covered later) governs "preserve" and retention periods.
Core Records Required
| Record | What It Contains |
|---|---|
| Trade blotters | Daily purchases and sales, with quantities and prices |
| General ledger and customer account ledgers | All financial transactions and customer balances |
| Order tickets | Each order with time of receipt, account, terms, and execution details |
| Customer account records | Name, address, tax ID, investment profile |
| Associated person records | Employment history, disciplinary history, licensing |
Customer Account Records Delivery
Rule 17a-3 requires the BD to furnish the customer account record to the customer:
- Within 30 days of account opening
- At least every 36 months thereafter
The customer record must contain the profile information used for suitability determinations.
Retention (Per Rule 17a-4)
Combined with Rule 17a-4 (the preservation rule), BDs must retain most records for 3 to 6 years, with the first 2 years readily accessible (in the office or electronically retrievable on short notice).
Exam Tip: Gotchas
- Customer account records must be furnished to the customer within 30 days of opening and every 36 months thereafter. The 36-month recertification is the most-missed piece of Rule 17a-3. Do not confuse the 30-day initial delivery with the 36-month refresh.