The enforcement of federal securities laws in the United States is the responsibility of several federal government agencies and industry regulators. The main regulators include the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the Commodities Futures Trading Commission (CFTC), and the Department of Justice (DOJ). Highlighted below are the intricacies of their procedures and practices.
Securities and Exchange Commission (SEC)
Headquartered in Washington, DC, the SEC employs 3,500 staff dispersed across 11 regional offices. There are five SEC commissioners appointed by the President of the United States.
The SEC is responsible for enforcing the two main securities laws in the United States: the Securities Act of 1933 and the Securities Exchange Act of 1934. It is organized into six principal divisions, each tasked with leading different enforcement and compliance efforts.
Corporate Finance: One of the busiest divisions, The Division of Corporate Finance reviews securities filings that public companies file with the SEC. Such public disclosure documents may include annual reports on Form 10-K, quarterly reports on Form 10-Q, registration statements, and proxy materials.
Enforcement: Another busy division, the Division of Enforcement is responsible for enforcing federal securities laws.
Investment Management: This division provides oversight of investment advisers, mutual funds, mutual fund managers, and market analysts.
Examinations: This division promotes compliance with securities laws among market participants.
Trading and Markets: This division maintains fair and orderly markets by monitoring stock exchanges, securities firms, FINRA, and other regulatory organizations.
Economic and Risk Analysis: This division supports the SEC in overseeing rulemaking, risk assessments, and data analysis.
The SEC’s Division of Enforcement conducts investigations into potential violations of securities laws. A variety of factors may trigger investigations. These factors include media reports, complaints to the SEC, private lawsuits, and irregularities company auditors or the SEC detect.
Six Specialized Units to Enforce Securities Laws
The SEC also has specialized units for enforcement. They are:
Complex financial instruments
Municipal securities and public pensions
Foreign Corrupt Practices Act (FCPA)
If the SEC’s Division of Enforcement finds suspicious circumstances after an initial investigation, it can proceed with a formal securities laws enforcement action. If the SEC files a civil complaint, enforcement action can be brought in a federal district court. Alternatively, the SEC can bring an enforcement action in an administrative proceeding. In this scenario, an SEC administrative law judge (ALJ) will preside over an administrative proceeding.
Financial Industry Regulatory Authority (FINRA)
FINRA is an organization that applies the securities laws to regulation of brokerage firms and exchange markets. Congress authorized it to monitor securities trading platforms and securities industry participants. Congress created it in 2007 as the successor organization to the National Association of Securities Dealers, Inc. (NASD).
FINRA’s Enforcement Department investigates potential violations of federal securities laws by broker-dealers or other associated persons. If the department determines there is a need for further action, it can reach a settlement with the violating broker-dealer or firm. Alternatively, FINRA’s Enforcement Department can file a complaint with the Office of Hearing Officers (OHO).
Commodities Futures Trading Commission (CFTC)
The Commodities Futures Trading Commission (CFTC) is tasked with oversight of U.S. derivatives markets. It regulates commodity futures and options markets under the federal securities laws. Congress created it in 1974 to enforce the Commodity Exchange Act.
Although the CFTC regulates some instruments that fall within the definition of a security, most of the instruments the CFTC regulates are not considered securities. For example, U.S. federal securities laws exclude swap agreements from the definition of a “security.” Therefore, the CFTC regulates non-security-based swaps. Meanwhile, the SEC regulates security-based swaps.
The CFTC is composed of five commissioners whom the President of the United States appoints. The commissioners serve staggered five-year terms. The CFTC has four main divisions:
Clearing and Risk
Market Participants Division
Similar to other U.S. federal securities laws regulatory bodies, the CFTC’s Division of Enforcement can investigate and prosecute individuals and entities for legal violations.
Department of Justice (DOJ): No Criminal Prosecutions Under Securities Laws
Although not a securities regulator, the Department of Justice has broad powers and can become involved in cases involving securities laws. The DOJ often conducts investigations into potential securities law violations concurrently with the SEC. The DOJ also routinely collaborates with the SEC on investigations. However, unlike the SEC, the DOJ does not have the authority to bring criminal actions against securities laws violators.