Your brokerage firm collapses and the shares in your account are missing. The federal securities regulator will not hand them back, and neither will the bank insurance fund. A different organization does, within fixed limits, and the exam expects you to know every player's lane.
An investor cannot inspect a company's books or watch every trade, so she relies on honest disclosure and honest prices. Section 2 of the Securities Exchange Act of 1934 (the Exchange Act) says that securities trading carries a national public interest and that market prices can be manipulated. That is why securities markets are regulated. Regulation has three goals:
- Protecting investors: Customers get full disclosure, honest dealing and a remedy when a firm cheats them or fails.
- Keeping markets fair and orderly: Prices come from real supply and demand, not manipulation, and every participant follows the same rules.
- Supporting capital formation: Companies and governments raise money more cheaply when investors trust the market.
Congress split this work among federal agencies, industry self-regulators, the states and two protection funds, and each has its own lane.
Common mistakes
- Making NASAA the regulator: An answer saying NASAA suspended an agent is wrong. NASAA registers and disciplines no one. The state administrator does, under state law.
- Sending MSRB cases to the MSRB: The MSRB only writes rules. FINRA, a bank regulator or the SEC enforces them, depending on who broke the rule.
- Giving the Fed maintenance margin: The Fed's number is the 50 percent initial requirement. The 25 percent maintenance minimum comes from FINRA Rule 4210.
Bottom line
- Securities regulation exists to protect investors, keep markets fair and orderly, and support capital formation.
- The SEC has five commissioners on five-year terms, no more than three from one party; it registers broker-dealers, writes rules, oversees SROs and brings civil and administrative cases, referring crimes to the Attorney General.
- SROs (exchanges such as Cboe, FINRA and clearing agencies) file every rule change with the SEC; FINRA enforces federal, MSRB and its own rules, while the MSRB writes municipal rules but enforces none.
- Treasury issues federal debt, writes government securities dealer rules and houses FinCEN, OFAC and the IRS, which administers federal tax law and receives broker-dealer tax reporting.
Exam shortcut
For any regulator question, ask two things: who writes the rule, and who enforces it? The two jobs fall to different bodies in three places. The MSRB writes municipal rules, and FINRA or a bank regulator enforces them. The Fed sets initial margin, and FINRA sets maintenance. Treasury, not the SEC, writes the rules for government securities dealers.
The full lesson (about 4,109 words, 27 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- A1
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