Regulatory Entities & Agencies

This page of our free SIE Study Guide covers the Securities and Exchange Commission, self-regulatory organizations, and other regulators.

Securities and Exchange Commission (“SEC”)

Securities laws and regulations are in place to protect market participants (investors) as well as to cultivate fair and efficient markets. As a United States government oversight agency, the SEC is responsible for ensuring such laws and regulations are complied with in the U.S. while other countries have their own separate commissions.

The SEC was established in 1934 during the Great Depression and works alongside self-regulatory agencies, state regulators, and Congress in order to uphold and improve upon securities regulations.

Below are four examples of legislation passed by Congress—and overseen by the SEC—that have shaped the securities industry as we know it.

The Securities Act of 1933: The first federal legislation targeted at the securities regulation industry, particularly the issuers of securities, such as companies seeking capital to fund their growth. This law requires issuers to comply with a series of rules, including disclosing all material company information, in order to protect investors from fraud. The SEC is charged with governing and enforcing this act.

The Securities Exchange Act of 1934: Regulates securities trading that takes place over the secondary market. Issuers are required by Congress to disclose information pertinent to the sale of their securities, and certain Issuers are required to file periodic reports with the SEC such as an annual report. These Issuers have over $10 million in assets and their securities are held by more than 500 owners.

  • The secondary market facilitates transactions in securities that are not sold directly by the issuer. Investors purchase securities from other investors in this market, typically through trading accounts held by brokerage firms like Fidelity or Charles Schwab.

The Investment Advisers Act of 1940: Limits the advertising investment advisers may engage in. The SEC’s implementation regulation is SEC Regulation 206 (4), named for it being covered by Section 206(4) of the Act. This section prohibits advertising that is “fraudulent, deceptive, and manipulative”, such as by referring to an external testimonial, or including an externally produced chart without providing full disclosure of limitations of its use. Another provision of this Act is the designation of “accredited investor” and “qualified client”, which is described in Section 205(3).

  • An “accredited investor” is defined as an individual/couple with net worth exceeding $1 million, or which earned in excess of $200K / $300 K for three successive years.
  • “Qualified client” designation is granted upon meeting one of five criteria, many of which relate to assets under management.
  • Registered investment advisors may charge performance fees to “accredited investors” and “qualified clients” but may not charge them to other clients.

The Investment Company Act of 1940: Regulates the organization of companies, including mutual funds and unit investment trusts, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public. The motivation is to reduce conflict of interests by requiring investment companies to disclose their financial condition and investment policies to investors, information about the fund and its investment objectives, as well as its investment company structure and operations.

  • This Act does not give the SEC authority to directly supervise the investment decisions or activities of these companies or judge the merits of their investments. Section 22 of the Act requires the redemption price to be based on the daily computation of net asset value and requires redemption prices to be paid within seven days. To ensure such proceeds are readily available, the SEC requires 85% of investment company assets to be in liquid securities, for which there are readily available market prices.

Self-Regulatory Organizations (SROs)

Similar to the SEC, SROs—such as FINRA and the securities exchanges—exist in order to protect investors by establishing industry procedures, compliance, and enforcement. Unlike the SEC, FINRA is not a government oversight agency and instead works under the supervision of the SEC.

Below are examples of SROs and their responsibilities.

New York Stock Exchange (NYSE): Created in 1792, the NYSE is the largest stock exchange in the world. In order to be listed on this exchange, companies must meet rigorous requirements that relate to their size and their finances. Once listed, they must continue to meet certain standards related to their number of stockholders, average monthly trading volume, and more. Some of the world’s oldest public companies are listed on the NYSE.

Chicago Board Options Exchange (CBOE): Created in 1973, the CBOE is the largest options exchange in the world. Through this exchange, investors are able to trade in put and call options on: publicly traded stocks, exchange-traded funds, and exchange-traded notes.

FINRA: Supervised by the SEC, FINRA is a not-for-profit organization charged with overseeing broker-dealers domiciled in the United States. Congress has authorized FINRA to protect the investing public by writing and enforcing rules, examining broker-dealers for compliance with these rules, ensuring market transparency, and providing education to investors.

Municipal Securities Regulatory Board (MSRB): Tasked with writing and enforcing rules and procedures for investment firms and banks who sell municipal bonds, notes, and other municipal securities.

  • Municipal securities are issued by a state, municipality, or a county in order to fund public projects. These projects might include the construction of an airport or a power plant. Municipal bonds are exempt from federal taxes and some state and local taxes, and interest paid on these bonds is frequently tax-free as well.

Other Regulators and Agencies

United States Treasury: The United States Treasury is an executive department of the federal government that was established by Congress in 1789 to manage government revenue. They oversee the Internal Revenue Service, the United States Mint, and the Bureau of Engraving and Printing. In 2014, the Financial Crimes Enforcement Network (FinCEN) was established as a bureau within the Treasury and was given a mandate to enforce the Currency and Foreign Transactions Reporting Act of 1970, which requires U.S. financial institutions to assist U.S. government agencies with detecting and preventing money laundering.

  • FinCEN’s primary role is to detect and prevent national and international money laundering attempts. Working under the Bank Secrecy Act (BSA), they require banks and other financial institutions to abide by reporting and recordkeeping rules as well as to submit a currency transaction report (CTR) for any transaction involving $10,000 or more of currency.

Internal Revenue Service (IRS): The IRS is a bureau of the United States Treasury and is responsible for collecting taxes and administering the tax law of the United States as required by Congress.

The Federal Reserve (“The Fed”): The Fed was established in 1913 under the Federal Reserve Act and is the central bank of the United States. It was created by Congress with a mandate to maximize employment, stabilize prices, and moderate long-term interest rates in order to provide a safe and healthy monetary and financial system. Its duties have expanded since 1913 and now include regulating banks, maintaining the stability of the financial system, and providing financial services to depository institutions.

State Regulators: Similar to FINRA, state regulators aim to protect the investing public from fraud. They achieve this primarily through providing education to investors and ensuring market transparency. One such example of state regulators is the North American Securities Administrators Association (NASAA), which is an organization comprised of securities regulators from the United States, Canada, and Mexico. Membership in the NASAA is voluntary.

  • In the United States, for example, each state has its own securities regulator that is responsible for the licensing of securities firms and advisers, registering securities offerings, auditing branch offices, educating investors, and enforcing state securities laws.

Federal Deposit Insurance Corporation (FDIC): The FDIC is an independent U.S. government agency that provides deposit insurance to U.S bank depositors. The FDIC was created by Congress through the 1933 Banking Act as a result of thousands of bank failures that occurred throughout the prior decade. They supervise more than 5,000 banking and savings institutions and provide deposit insurance of up to $250,000 per depositor.

Securities Investor Protection Corporation (SIPC): SIPC was created by Congress in 1970 through the Securities Investor Protection Act in order to restore trust in the U.S. securities industry. Between the years of 1968 and 1970, stock prices declined significantly as a result of hundreds of broker-dealers getting acquired or going bankrupt, and many investors subsequently lost all of their cash and/or securities. Eligible investors are insured by SIPC for up to $250,000 in cash in their brokerage accounts.

Foreign Country Regulators: Most countries have their own government regulatory agencies similar to the SEC. For example, the United Kingdom has the Financial Conduct Authority (FCA) and Croatia has the Croatian Financial Services Supervisory Agency.

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