How well this system works is sometimes subject to debate. There have been market specialist firms at the New York Stock Exchange fined over $240 million for stealing profits—they were taking trading opportunities they were supposed to give to investors. You may have read about a stockbroker trading an older adult’s retirement account without authorization, for example. In those cases, the system is working, because you’re reading about it, and they have been caught.
How Is the Stock Market Highly Regulated?
The securities industry is one of the most highly regulated industries in the United States. The U.S. Congress is at the top of the list of security industry regulators. It created most of the structure and passes legislation that affects how the industry operates. It also authorizes budgets for the Securities and Exchange Commission (SEC) and other agencies involved in regulatory duties.
The SEC, FINRA, and the Exchanges
The SEC also oversees all of the stock exchanges and any organization connected with the selling of securities. It also has a robust anti-fraud unit that monitors advertising and marketing to ensure that companies comply with strict securities sales rules.
Financial Industry Regulatory Authority
Working independently from a government agency, the Financial Industry Regulatory Authority (FINRA) is an independent organization that creates and enforces rules that apply to brokers, broker-dealer firms, and funding portals. It is a self-regulatory body that is responsible for policing the securities industry. It was created in 2007 when the National Association of Securities Dealers merged with the New York Stock Exchange’s regulatory functions. FINRA also provides resources for individual investors and administers exams that professionals need to pass to work in the securities industry. FINRA is not an organization without authority. It can levy individuals and organizations for unethical behavior and can revoke licenses. The agency also provides dispute-resolution services, such as mediation and arbitration. FINRA takes complaints from investors about securities professionals it believes have acted unethically or illegally. It monitors the trading activities of member firms to detect illicit trading patterns and other unlawful activities. Investors who are looking for a broker or information on their current broker can use FINRA’s BrokerCheck to find out more about them.
Individual Exchanges
The individual exchanges also have sophisticated oversight functions within their operations. For example, the NASDAQ has an Investigations and Enforcement Team, who investigates misconduct and enforces the exchange’s rules. NASDAQ has also contracted FINRA to undertake specific functions and activities for the exchange while leaving the responsibility and control with NASDAQ.
Individual States and Brokerages
Individual state governments also have securities divisions, although they are usually not as sophisticated as FINRA. Often, they respond to complaints and register securities that will be sold within the boundaries of the state. The final step of securities protection lies with brokerage firms and professionals. Every licensed broker or dealer involved in securities must keep individual records and perform checks and audits of their operations to ensure that they conduct business within acceptable legal and ethical guidelines.
What Can Investors Do?
Reporting suspicious, illicit or unethical securities behavior is essential to ensuring that bad actors are caught. Regulatory agencies cannot do all of the work themselves. Investors can also use the regulatory agencies’ tools and published knowledge to inform themselves and keep their capital safe and working for them. When choosing brokers or dealers, do a background check, and ask for references. It can be challenging to identify a securities professional who is violating the law, but you can reduce the chances of being used by one to further their agenda by doing your due diligence.
