Securities Regulators

The government securities regulators play an important role in the licensing and registration of investment professionals and the financial products they sell. With all this regulation, however, it is still the investor's responsibility to make wise choices about the professionals with whom they work and the products in which they invest. Understanding the basics of state, federal, and industry oversight will help you know the extent and limits of consumer protection by these entities.

The role of the States

State securities regulators have protected investors from fraud for nearly 100 years. Securities markets are global: however, securities are sold locally by professionals who are licensed in every state where they conduct business. State securities regulators work within your state government to protect investors and help maintain the integrity of the securities industry.

A state securities regulator can: verify that a broker-dealer or investment adviser is properly licensed; provide information about a financial professional's educational background, work history, as well as prior run-ins with regulators that led to disciplinary or enforcement actions; provide a computer link or telephone number or address where you can file a complaint. Depending on the size of the investment advisory firm, some will register with state securities regulators and others with the federal government.

For contact information for your State securities regulator, visit the North American Securities Administrators Association Web site at

http://www.nasaa.org and click on "contact your regulator."

The Role of the Federal Government

Federal securities regulation focuses on the broader issue of how the stock market works on a national and international basis. Important federal securities laws were enacted in the early 1930,s. A major impetus behind these new laws was the stock market crash of 1929 and the abusive practices that led to the crash. The Securities Act of 1933 is known as the "truth in securities" law and has two objectives: to require that investors be provided with informaiton concerning securities offered for public sale; and to prevent misrepresentation, deceit, and other fraud in the sale of securities. As a result of this law, securities must be registered with the Securities and Exchange Commission (SEC). Registration is intended to provide adquate and accurate disclosure of facts concerning the company and the securities it propes to sell.

Registration of securities does not prevent the sale of stock in risky, poorly managed or uprofitable companies. Nor does the SEC approve or dsapprove securities based on their investment quality. While the Securities Act of 1933 offers some consumer protection, the burden of making sound investment choices remains with the investor. The Securities Exchange Act of 1934 created the Securities and Exchange Commission and spells out the SEC's licensing and regulatory duties. Their power extends to the over-the-counter markets as well as the stock exchanges.

The Security Investors Protection Act of 1970 established the Security Investors Protection Corporation (SIPC), which is similar in its operation to the Federal Deposit Insurance Corporation that insures deposits in financial institutions. The SIPC statute provides for the return of certain customer assets in the event of financial failure of a brokerage firm that is an SIPC member. However, SIPC provides no protection for a decline in the value of securities as a result of economic conditions or fraud.

The Commodity Futures Trading Commission (CFTC) is an agency of the federal government that is similar to the SEC. It regulates futures contracts and the trading of commodities on boards of trade, which are similar to stock exchanges.

Self-Regulatory Organizations

The SEC delegates significant regulatory authority to a number of self-regulatory organizations (SROs). These SROs include the National Association of Securities Dealers (NASD), the New York Stock Exchange (NYSE), a number of regional stock exchanges, and five options exchanges. The SEC oversees the SROs using the authority it has been granted by the U.S. Congress. All SRO rules and regulations must be approved by the SEC before they can take effect.

Self=regulatory organizations (SROs) are bodies that provide a means for the securities and futures industries to assume part of the responsibility of policing themselves. The two main SROs are the National Association of Securities Dealers (NASD) and National Futures Association (NFA), which are monitored by the SEC and the CFTC, respectively. Among the responsibilities of the SROs are to:

Establish rules governing trading and other activities.

Set qualifications for industry professionals.

Oversee the conduct of their members.

Impose discipline in instances of unethical or illegal behavior.

Administer the licensing process, including background investigations and licensing examinations.

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