How well this system works is sometimes subject to debate; however, it works for the vast majority of investors. Although when we read about market specialist firms at the New York Stock Exchange paying $240 million plus in fines for trading their interests over ours, it is hard to see how the system is protecting us.
If you read about mutual firm executives, trading after the market closes for their own accounts (a big no-no) or a stockbroker trading an elderly person’s retirement account away, it makes you wonder where the watchdogs are.
Highly RegulatedNevertheless, the securities industry is one of the most highly regulated businesses in the United States.
The U.S. Congress is at the top of the heap. It created most of the structure and it passes major laws that affect how the industry operates. It also authorizes budgets for the Securities and Exchange Commission and other agencies involved in regulatory duties.
The SEC is the top regulatory agency responsible for overseeing the securities industry. It registers new securities and handles all the filings that public companies must make, such as annual and quarterly reports.
The SECThe SEC also oversees all of the stock exchanges and any organization connected with the selling of securities. It also has a strong anti-fraud unit that monitors advertising and marketing to make sure companies comply with strict rules concerning the sale of securities.
At the next level is the Financial Industry Regulatory Authority (FINRA). It was created in 2007 when the National Association of Securities Dealers merged with the regulatory functions of the New York Stock Exchange. This is an industry self-regulatory body that is responsible for policing the securities industry.
FINRA set standards for stockbrokers and other industry professionals and licenses them after comprehensive examinations.
No Toothless DogFINRA is not a toothless group. They have the ability to fine individuals and organizations for unethical behavior and can revoke licenses.
The organization is usually the place customers can take complaints of behavior they feel in unethical or illegal. FINRA also monitors trading activities of member firms to detect illegal trading patterns and other illegal activity.
The individual exchanges also have sophisticated regulatory oversight functions within their own operations. These include monitoring trades and other steps to see that the customer gets a fair deal.
Individual StatesIndividual states also have securities divisions, although they are usually not as sophisticated as FINRA. Often they handle complaints and register securities that will be sold within the boundaries of the state, although this will vary from state to state.
The final step of protection is at the brokerage level. Each firm is required to keep certain records and perform certain checks and audits of the operation to make sure their brokers are operating within acceptable legal and ethical guidelines.