Every game has its rules, and for rules to work, there needs to be some kind of referee. In the field of investing, that’s the Securities and Exchange Commission (SEC). The SEC writes regulations for the financial sphere, such as the stock market and other securities. Very often while investing, you’ll run into their name as the reason things have to happen a certain way. Though sometimes these regulations may seem burdensome, many of them protect you as an investor.
What Is the SEC?
The SEC began in 1934, in the hopes of protecting the economy after the stock market crash of 1929. A safer playing field would restore investor confidence that the same thing wouldn’t happen again. It is led by five commissioners, appointed by the president. To keep it bipartisan, no more than three of the five commissioners can belong to the same party.
Its mission is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. The SEC requires certain disclosures from investment professionals and companies to make sure investors know what they are getting. They enforce a number of federal laws about investment transparency.
They also monitor the stock market and many other securities exchanges. This includes regulating investment advisors and broker-dealers. They keep an eye out for scams, insider trading, dishonest marketing of investment opportunities, and so on.
They aid in capital formation by facilitating companies’ public offerings. This helps a business raise money through selling shares. Any public offering must be registered with the SEC in order to protect both the business and investors.
What About FINRA?
The SEC is sometimes confused with the Financial Industry Regulatory Authority (FINRA). Both are organizations responsible for combating fraud, and both may have something to say about your financial advisor. However, while the SEC is part of the US government, FINRA is an independent organization.
FINRA is a membership-based group that regulates securities firms and investment representatives. Their job is to license and regulate financial professionals within the guidelines set by federal law.
The confusion probably comes from the SEC’s oversight of FINRA. While FINRA is not part of the government, it licenses professionals based on the SEC’s rulings. Like the SEC, FINRA exists to protect you, the consumer. It offers a tool called BrokerCheck which allows you to find out details on brokers and financial advisors. This lets you see an advisor’s employment history, qualifications, and past complaints. By looking up a potential advisor, you can learn whether they have a history of fraud or have lied about their qualifications.
What Doesn’t the SEC Regulate?
Most of your investment options are regulated by the SEC. The stock market is, your investment advisor is, and every fund you buy is. But what types of things fall outside their purview?
A few types of investments are either exempt or ruled not securities at all. These investments, since they’re not regulated by the SEC, may be riskier deals. However, some are just too small for the SEC to worry about.
- Private offerings. When a company wants to raise capital without going public, they can make a private offering. By selling shares only to qualified investors, they are allowed to bypass SEC approval.
- Crowdfunding. Very small businesses and individuals often raise capital by crowdfunding. While you do gather money from people and promise rewards, it isn’t considered a security.
- Cryptocurrency. Here the waters are muddy. Some people think crypto is a commodity, like steel or wheat, and thus should be regulated by the Commodity Futures Trading Commission (CFTC). Others think it’s a security and should be regulated by the SEC. This confusion has resulted in many rule changes recently, and it’s still not certain what the regulations for crypto will be in the future.
Are You Protected?
No matter who you are, the SEC protects you by regulating the financial system in this country. They’re the reason securities have to be as transparent as they currently are. When you buy a stock or a fund, you can know what you are receiving.SEC regulations also keep you from being defrauded by investment advisors who aren’t what they seem. To find an honest advisor with the right qualifications, contact us today.