How Is the Stock Market Regulated?
Regulators are supposed to protect you
Before you start trading in the market, it's important to know who helps protect investors from fraud and other illegal activities. A complicated regulatory structure is in place and it watches out for individual investors.
How well this system works is sometimes subject to debate. It works for the vast majority of investors. However, there have been market specialist firms at the New York Stock Exchange paying over $240 million in fines for trading their interests over ours, which makes it hard to see how the system is protecting us.
If you read about mutual fund 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, you may wonder where the watchdogs are. Here's what to know about how the stock market is regulated.
Is the Stock Market Highly Regulated?
The securities industry is one of the most highly regulated businesses in the United States.
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 (SEC) 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 SEC, FINRA, and the Stock Market
The 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.
FINRA is not a toothless group. It has 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 is 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 States and Brokerages
Individual 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.
- The SEC is responsible for overseeing all of the stock exchanges and any organization connected with the selling of securities.
- FINRA sets standards and approves or revokes licenses for stockbrokers and other professionals.
- Individual states and brokerages are also tasked with handling complaints, registering securities, keeping records, and/or performing checks and audits to ensure there is no illegal activity taking place.
U.S. Securities and Exchange Commission. "Settlement Reached With Five Specialist Firms for Violating Federal Securities Laws and NYSE Regulations; Firms Will Pay More Than $240 Million in Penalties and Disgorgement." Accessed Sept. 1, 2020.