Financial Regulation and Compliance. Kotz H. David

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      Beyond the banking regulators, the Securities and Exchange Commission (“SEC”) regulates securities exchanges and brokers.7 Lastly, the Commodity Futures Trading Commission (“CFTC”) regulates futures exchanges and brokers.8

      1.2 THE SECURITIES AND EXCHANGE COMMISSION (SEC)

      Congress established the SEC in 1934 to enforce the Securities Act of 1933 and the Securities Exchange Act of 1934 (the “Exchange Act”).9 The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.10 The SEC oversees the key components of the securities world, including securities exchanges, securities brokers and dealers, investment advisers, and mutual funds. The SEC's primary focus is to promote the disclosure of market-related information, maintain fair dealing, and protect against fraud.11

      Although the SEC is the principal overseer and regulator of the U.S. securities markets, it works closely with the other federal departments and Agencies, self-regulatory organizations, state securities regulators, and various private sector organizations. For example, the Chairman of the SEC works with the Chairman of the Federal Reserve, the Secretary of the Treasury, and the Chairman of the CFTC, and serves as a member of the President's Working Group on Financial Markets.

      The SEC is composed of five presidentially-appointed Commissioners, who have staggered five-year terms. By law, no more than three of the Commissioners may belong to the same political party. The Agency's functional responsibilities are organized into five divisions (Corporation Finance, Trading and Markets, Investment Management, Enforcement, and Economic and Risk Analysis) and 23 offices, headquartered in Washington, D.C.12

      The SEC's Division of Corporation Finance oversees corporate disclosure of information to the investing public. Corporations are required to comply with regulations pertaining to disclosure that must be made when stock is initially sold and then on a continuing and periodic basis. Corporation Finance (known as “CorpFin”) reviews the disclosure documents filed by companies. CorpFin also provides companies with assistance interpreting the Commission's regulations and recommends to the Commission new rules for adoption.13

      The SEC's Division of Trading and Markets is responsible for maintaining fair, orderly, and efficient markets. Trading and Markets provides day-to-day oversight of the major securities market participants: the securities exchanges; securities firms; self-regulatory organizations; clearing Agencies that help facilitate trade settlement; transfer agents, parties that maintain records of securities owners; securities information processors; and credit rating Agencies. This Division also oversees the Securities Investor Protection Corporation (“SIPC”), which is a private, non-profit corporation that insures the securities and cash in customer accounts of member brokerage firms against the failure of those firms.14

      The SEC's Division of Investment Management is involved in investor protection and promoting capital formation through oversight and regulation of America's $26 trillion investment management industry. This industry includes mutual funds and the professional fund managers who advise them; analysts who research individual assets and asset classes; and investment advisers to individual customers. Investment Management focuses on ensuring that disclosures about these investments are useful to retail customers, and that the regulatory costs which consumers must bear are not excessive.15

      The Division of Enforcement is the law enforcement component of the SEC. It recommends the commencement of investigations of securities law violations, whether as civil actions in federal court or as administrative proceedings before an administrative law judge, and prosecutes these cases on behalf of the Commission. Enforcement also works closely with law enforcement Agencies such as the Department of Justice to bring criminal cases. Enforcement obtains evidence of possible violations of the securities laws from many sources, including market surveillance activities, investor tips and complaints, other divisions and offices of the SEC, and the self-regulatory organizations and other securities industry sources.16

      The SEC's Division of Economic and Risk Analysis (known as “RiskFin”) is involved with integrating economic analysis and data analytics into the work of the SEC. RiskFin helps to inform the SEC's policymaking, rulemaking, enforcement, and examinations.17

      The offices within the SEC include, among others, the Office of the General Counsel, Office of the Chief Accountant, Office of Credit Ratings, Office of International Affairs, Office of Investor Education and Advocacy, and Office of Compliance Inspections and Examinations (“OCIE”). OCIE administers the SEC's examination and inspection program for registered broker-dealers, transfer agents, clearing Agencies, investment companies, and investment advisers. OCIE conducts inspections to foster compliance of the securities laws and to detect violations of the law. When OCIE finds deficiencies, it issues a “deficiency letter” identifying the problems that need to be rectified and monitors the situation until compliance standards are achieved. Violations that are considered serious are referred to the Division of Enforcement. OCIE also examines SROs including national stock exchanges (such as the New York Stock Exchange, NASDAQ, and Chicago Options Board Exchange), registered clearing Agencies, the Municipal Securities Rulemaking Board and the Financial Industry Regulatory Authority (“FINRA”).18

      OCIE oversees FINRA and the other SROs to ensure that they and their members comply with applicable federal securities laws and SRO rules. Consistent with its oversight responsibilities for other SROs, the SEC is responsible for ensuring that FINRA carries out its regulatory responsibilities related to oversight of broker-dealers. The SEC also oversees the adoption of rules and the administration of discipline by SROs such as FINRA. These requirements include that an SRO file a proposed rule change with SEC and publish it on a publicly available website. The SEC then sends a notice of the proposed rule change to the Federal Register and allows interested persons the opportunity to submit written comments concerning the proposed rule change. Concurrently, the SEC reviews the proposed rule change and, if applicable, considers public comments and the SRO's response. The SEC then determines whether the proposed rule change is consistent with the requirements of the applicable statutes and regulations and if appropriate, approves the rule change.

      As regulators, SROs, like FINRA, have responsibility for much of the day-to-day oversight of the securities markets and broker-dealers under their jurisdiction. Specifically, SROs are primarily responsible for establishing the standards under which their members conduct business; monitoring the way that business is conducted; and bringing disciplinary actions against their members for violating applicable federal statutes, SEC rules, and their own rules.

      1.3 THE FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINRA)

      FINRA is the only registered national securities association and has regulatory oversight of all securities broker-dealers doing business with the public in the United States. FINRA's mission is to safeguard the investing public against fraud and bad practices. All brokers must be licensed and registered by FINRA, pass qualification exams, and satisfy continuing education requirements. FINRA conducts routine examinations, as well as inquiries based on investor complaints and suspicious activity. It also reviews all broker advertisements, websites, sales brochures, and other communications to make sure brokers present information in a fair and balanced manner. FINRA also monitors trading in the U.S. stock markets.19

      FINRA

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