A stock market consists of several marketplaces where shares of publicly traded firms can be purchased and sold. Such financial transactions occur through official exchanges and over-the-counter (OTC) markets that adhere to a predetermined set of rules.
The terms "stock exchange" and "stock market" are frequently used interchangeably. Investors purchase and sell shares of stock on one or more than one of the stock exchanges that make up the broader stock market.
The New York Stock Exchange (NYSE) and the Nasdaq are two of the most significant U.S. stock exchanges.
The following article provides a detailed review of many of the agencies in the American financial industry regulating the stock market.
How are stock markets regulated?
Most countries have stock markets, and regional financial watchdogs, monetary authorities, or other institutions regulate them. The SEC is the regulatory organization in charge of regulating the American stock market.
The SEC is a governmental organization that operates without interference from politics or the executive branch. The SEC is charged with "protecting investors, ensuring fair, orderly, and efficient markets, and enabling capital formation," according to its mission statement.
Companies that are listed on stock exchanges are subject to regulation, and the SEC keeps an eye on their business dealings. In order to guarantee that all market participants are similarly informed, the exchanges also set certain rules, such as regulating the timely submission of quarterly financial reports and prompt reporting of pertinent company happenings.
Trade suspension and other disciplinary actions may result from breaking the rules.
Financial Industry Regulatory Authority
When the regulatory responsibilities of the NYSE and the National Association of Securities Dealers (NASD) collaborated in 2007, the Financial Industry Regulatory Authority (FINRA) was formed. The Securities Exchange Act of 1934 led to the creation of FINRA, which is regarded as a self-regulatory organization (SRO).
The Financial Industry Regulatory Authority (FINRA) is a self-regulatory and non-governmental organization. It develops and upholds regulations that pertain to brokers, broker-dealer businesses, and financing portals. It is a self-regulatory organization tasked with maintaining order in the securities sector.
FINRA also conducts exams that individuals must pass to work in the securities industry and offers information for private investors. The FINRA is a legitimate organization with authority to cancel licenses and charge people and organizations for unethical actions. The organization also provides dispute-resolution options like arbitration and mediation.
FINRA accepts investor complaints regarding securities professionals engaged in unethical or unlawful behavior and undergoes investigation. It monitors member companies' trading operations to look for illegal trading trends and other wrongdoing. Investors can use FINRA's BrokerCheck to learn more about a broker or details about the current broker.
Individual States and Brokerages
There are securities sections within each state government as well, though FINRA is typically less advanced than they are. They frequently respond to complaints and register securities that will be sold inside the state's borders.
Brokerage companies and professionals are responsible for the last stage of securities protection. Every registered broker or dealer who deals in securities must maintain their own records, conduct internal audits, and execute checks to ensure their activities adhere to accepted moral and legal standards.
State Securities Regulators
These organizations work in addition to FINRA and the SEC to regulate the state's securities industry. For financial advisors that are not needed to register with the SEC, they offer registrations and take legal action against those advisors.
State Securities and Exchange Commission (SEC)
The Securities Exchange Act of 1934 created the SEC, which functions independently of the United States federal government.
The SEC, one of the most extensive and powerful organizations, oversees the majority of the securities industry in addition to enforcing federal securities laws. All other electronic exchanges and other electronic securities markets are covered by its regulatory authority, as well as the U.S. stock exchanges, options exchanges, and options markets. Investment advisors that state regulatory organizations do not cover are also governed by it.
Six divisions and 24 offices make up the SEC. Their objectives include:
- Interpreting securities laws.
- Issuing new regulations.
- Carrying out enforcement actions.
- Supervising securities institutions.
- Coordinating regulation among various levels of government.
Only civil lawsuits may be filed by the SEC in federal court or in front of an administrative judge. The Department of Justice's law enforcement agencies is responsible for handling criminal prosecutions, although the SEC frequently collaborates closely with them to provide evidence and support legal procedures.
Importance of Stock Market
A free-market economy includes the stock market as one of its elements. It enables businesses to increase funds by selling corporate bonds and stock shares, giving investors a chance to profit from the business's financial success through capital gains and dividend payments. The stock market serves as a platform for directing individual investors' savings and investments into profitable business ventures, which helps the nation's capital formation and economic expansion.
How Can Investors Play their Part?
For bad actors to be apprehended, suspicious, illegal, or unethical securities activities must be reported. Regulatory bodies are only able to complete some of the tasks on their own.
Investors can also educate themselves and keep their money secure and working for them by using the resources and information published by regulatory organizations. Check references and run a background check on potential brokers or dealers. It can be difficult to spot a securities expert who is breaking the law, but by exercising due diligence, you can lessen the likelihood of becoming a tool in their hands.
Bottom Line
All stock exchanges and businesses involved in the sale of securities must be under the SEC's supervision. FINRA establishes criteria and grants or revokes licenses for stockbrokers and other professionals. Individual state governments and brokerages ensure that no illicit behavior occurs and manage complaints, register securities, maintain records, and conduct checks and audits.
