Every day, millions of people go to the stock market with thoughts of making it big and billions in cash and stocks change hand as a result.
But unlike some other Industries like Banking or Insurance, Investments in the financial markets are not guaranteed by the Federal Government.
With so much money at stake, so many players involved, and no guarantees to prevent Investor losses, the government tries to make the system as fair as possible.
While the U.S. Congress passes and amends laws that affect how the Financial Industry operates, it has also set up the Securities and Exchange Commission, referred to as the SEC to make sure that all the players involved are following the rules.
While the SEC is the prime regulatory body with a mission to protect all investors, maintain fair, orderly, and efficient markets and facilitate capital formation, other agencies such as FINRA have a specific range of duties and responsibilities that enable them to act independently of each other while still working to accomplish similar objectives.
The SEC
The SEC has robust systems in place to oversee any new companies entering the market to raise capital.
These companies must follow the most stringent of guidelines during the IPO process.
Even after being listed, the SEC has statutory requirements in place that these companies must submit quarterly and annual reports. These reports are closely watched by analysts and investors alike and are crucial for investors to make sound decisions when investing in the stock market.
Technical Stuff
Public Companies must file Quarterly Reports (Form 10-Q) and Annual Reports (Form 10K) electronically through a system called EDGAR (Electronic Data Gathering, Analysis, and Retrieval)
These reports can then be accessed by the public for research, analysis and investing decisions. The availability of Financial reports in this manner is called public filings.
The purpose of public filings is to maintain transparency and fairness in securities markets so that all investors get a level playing field while reducing the incidents of fraud and insider trading.
Apart from Financial reports, companies must also provide a narrative account from their executives, called the "Management Discussion and Analysis" (MD&A).
The MD & A outlines a companies financial results and also touches on future goals and new projects. However, executives take great care during drafting and publishing the MD & A as they are fully aware that the SEC is reviewing these filings and so they don't want to say anything that may haunt them later.
FINRA
With more than 4,750 firms that are members and 634,000 employees registered to sell securities, much like the SEC, another organization called the Financial Industry Regulatory Authority or FINRA works at the grassroots level to monitor trading activity and detect any illegal trading patterns.
Established in 2007, FINRA is a private government-authorized not-for-profit organization that oversees U.S. broker-dealers.
It also sets the standard for industry professionals by administering background checks and licensing exams, regulating trading, and monitoring compliance of all applicable securities laws.
Despite being a private organization, it still holds the power to fine individuals and organizations for unethical behavior and can also revoke licenses.
Another layer of protection comes at the Exchange and Brokerage levels.
Individual exchanges have sophisticated oversight functions within their own operations. These include monitoring trades and other steps to see that the customer gets a fair deal.
The exchanges also monitor trading in order to look for patterns that might point to market manipulation or insider trading.
Brokerages are also mandated to keep records and perform certain checks & audit their operations to make sure their brokers are operating within acceptable legal and ethical guidelines.
All these regulators and protection mechanisms make the securities industry is one of the most highly regulated businesses in the United States.
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