During the Roaring 1920s, lured by “get rich quick” promises and easily available credit, many investors fell victim to unscrupulous trading tactics. At the time, there was little support for federal regulation of the securities markets.
But after the Great Crash of October 1929, that quickly changed. To rebuild the economy and restore investor confidence, investment industry watchdogs were created. Today, institutions such as the SEC and FINRA continue to provide oversight and protect investors.
The Securities and Exchange Commission (SEC)
During the peak of the Great Depression, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. These two laws require companies that publicly offer securities for investment dollars to honestly and publicly disclose their businesses, the securities they are selling and the risks involved in investing. In addition, brokers, dealers and exchanges must treat investors fairly and honestly. Congress created the SEC to enforce these laws.
The SEC interprets federal securities laws; issues new rules and amends existing rules; and oversees the inspection of securities firms, brokers, investment advisors and ratings agencies. In addition, the SEC oversees private regulatory organizations in the securities, accounting and auditing fields and coordinates U.S. securities regulation with federal, state and foreign authorities.
Financial Industry Regulatory Authority Inc. (FINRA)
In July 2007, the National Association of Securities Dealers Inc. (NASD) and the New York Stock Exchange’s (NYSE) member regulation, enforcement and arbitration operations were consolidated, resulting in FINRA. FINRA is the largest non-governmental regulator for all securities firms doing business in the United States, and oversees nearly 5,100 brokerage firms and more than 669,000 registered securities representatives.*
FINRA registers and educates industry participants, examines securities firms, writes and enforces rules and enforces federal securities laws. FINRA also informs and educates investors, provides trade reporting and other industry utilities, administers a dispute resolution forum and performs market regulation.
Other Agencies and Institutions
Federal law requires brokerage firms to separate customers' investments from the firm's money. The money you invest with the brokerage is held by an independent depository, so even if the firm goes belly up, your accounts should remain intact. But what if the company didn't follow those rules and misappropriated its customers' assets? That’s where the Securities Investor Protection Corporation (SIPC) comes in.
The SIPC will return "customers' cash, stock and other securities" if a company fails or customer assets are missing, up to certain limits. The SIPC first returns your share of the broker's remaining assets, then uses up to $500,000 of its own funds to make up for any additional missing funds. The SIPC does not protect you from market losses.
The Pension Benefit Guaranty Corporation (PBGC) is a federal agency created by the Employee Retirement Income Security Act of 1974 (ERISA) to protect pension benefits in traditional pension plans, such as your CalSTRS or CalPERS defined benefit pension. If a covered plan ends (this is called “plan termination”) without sufficient money to pay all benefits, PBGC's insurance program will pay the benefit provided by the pension plan up to the limits set by law. The PBGC does not cover defined contribution plans, such as 403(b) or 457 plans.
* Source: FINRA, www.finra.org.