Regulatory Compliance and Enforcement in the Securities Industry
Federal securities law is enforced in several ways. The primary enforcer of U.S. securities laws is the Securities & Exchange Commission (SEC). This federal agency is charged with ensuring that investment firms and advisers, securities brokers, and investors comply with the various federal securities regulations passed by Congress and promulgated by the SEC itself.
Industry organizations also have the power to make and enforce some rules that govern securities transactions and related activities. But only members of the organizations are subject to their jurisdiction.
Finally, investors have the right to bring private actions to enforce some securities laws.
One of the SEC’s primary functions is to investigate and bring civil actions against those suspected of committing securities fraud and other violations of U.S law. The agency gathers evidence of suspected fraud from surveillance operations, tips from investors, industry organizations, and the media. If, based on the evidence, the SEC suspects that a person or company may have violated the law, it may begin an investigation, during which it has the power to subpoena documents and witnesses. After the investigation, the agency can choose to do nothing, attempt to settle the case before a complaint is filed, file an administrative law complaint, or file a case in U.S. district court.
The SEC also has the power to promulgate laws that help it enforce acts of Congress. Generally, laws such as the 1934 Act are written too broadly to conceive of every possible situation, especially since many of these laws were written before the advent of computers and the internet. Thus, Congress permits the SEC to pass administrative laws that uphold the basic principles of Congressional legislation and that can be updated as times change and new schemes are devised.
The SEC enforces federal laws. Many states have agencies whose duties include enforcing the state’s securities laws, often called blue sky laws.
In addition to the SEC, some industry organizations are tasked with enforcement of laws, rules, and ethical standards. The Financial Industry Regulatory Authority (FINRA) is a private organization that self-regulates the securities industry under permission from the SEC.
FINRA passes rules that its members must follow. Although FINRA cannot file civil lawsuits against those who break its rules, it can conduct investigations of members, levy fines, and order restitution to investors. Additionally, FINRA forwards hundreds of cases each year to the SEC so that the agency has the opportunity to investigate and, if necessary, litigate cases against suspected perpetrators of securities fraud.
Private investors also play a role in enforcing securities laws. Some federal laws provide a private right of action to investors defrauded by brokers. Most notably, Rule 10b-5 prohibits fraudulent and deceitful behavior, including misstatements or omission of material facts, in connection with the sale or purchase of a security. Investors may file a civil lawsuit against brokers who have violated Rule 10b-5.
Many states also have laws that grant private investors the right to bring lawsuits against brokers who have committed fraud.