Antifraud, Competition, and Recordkeeping for New Issues
Quick Answer
Four rules frame broker-dealer conduct around new issues. The Securities Act's competition mandate forces the SEC to weigh efficiency, competition, and capital formation. The Securities Act's antifraud provision applies to every securities transaction, even exempt ones. The broker-dealer antifraud rule bars BD-specific manipulative devices, and the broker-dealer recordkeeping rules require 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 competition factors does the SEC have to consider?
The Securities Act's competition mandate 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," it must 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 the modernized intrastate-offering safe harbor: the competition mandate 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: The competition mandate is why Reg D exists at all. Small businesses cannot afford a full registration process, and the mandate forces the SEC to carve out private-placement pathways that keep capital flowing to them.
The Securities Act's Antifraud Provision
The Securities Act's antifraud provision is the statute's general fraud prohibition. 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
The antifraud provision applies to every securities transaction, including:
- Registered offerings
- Exempt-class securities (government, municipal, commercial paper, nonprofit)
- Reg D private placements
- Intrastate offerings
It does not care whether the security is registered. It cares whether there was fraud.
Scienter Standards
- The "device, scheme, or artifice to defraud" prong: requires scienter (intent or recklessness). This is the criminal-liability track.
- The material-misstatement and fraud-or-deceit prongs: can reach negligent conduct. Scienter is not required.
Exam Tip: Gotchas
- The Securities Act's antifraud provision 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.
What manipulative or deceptive devices are broker-dealers prohibited from using?
The broker-dealer antifraud rule is the BD-specific antifraud provision under the Securities Exchange Act (SEA).
- 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 the Securities Act's antifraud provision and the general antifraud rule
- Focuses specifically on BD conduct, whereas the Securities Act's antifraud provision covers any transaction participant
Exam Tip: Gotchas
- Do not confuse the BD antifraud rule, the general antifraud rule, and the trade-confirmation rule. The BD antifraud rule targets manipulative or deceptive broker-dealer conduct. The general antifraud rule covers manipulation in connection with the purchase or sale of any security. The trade-confirmation rule (covered in the Customer Records unit) governs confirmation delivery. Different rules, different purposes.
What records must broker-dealers create?
The broker-dealer record-creation rule requires BDs to create and maintain detailed records of their business activities. It is the "make" side of BD recordkeeping. The companion broker-dealer record-preservation rule (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
The record-creation rule 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 the Companion Preservation Rule)
Combined with the broker-dealer record-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 the record-creation rule. Do not confuse the 30-day initial delivery with the 36-month refresh.