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 Security and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the Commodities Futures Trading Commission (CFTC) and the Department of Justice (DOJ). Below are the intricacies of their procedures and practices.

Securities and Exchange Commission (SEC)

Based in Washington, DC, the SEC employs 3,500 people in 11 regional offices. There are five SEC Commissioners appointed by the President of the United States.

The SEC is responsible for the administration of 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 main divisions, each responsible for directing different efforts to enforcement and compliance.

  • Corporate Finance: One of the most active divisions, the Corporate Finance Division reviews securities filings that public companies file with the SEC. These public disclosure documents may include annual reports on Form 10-K, quarterly reports on Form 10-Q, registration statements and proxy documents.
  • Enforcement: Another busy division, the Enforcement Division is responsible for enforcing federal securities laws.
  • Investment Management: This division oversees investment advisers, mutual funds, mutual fund managers and market analysts.
  • Reviews: 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 agencies.
  • Economic and risk analysis: This division assists the SEC in overseeing rulemaking, risk assessments, and data analysis.

The SEC’s Division of Enforcement conducts investigations into potential violations of securities laws. Various factors can trigger investigations. These factors include media reports, complaints to the SEC, private lawsuits, and irregularities detected by company auditors or the SEC.

Six specialized units to enforce securities laws

The SEC also has specialized enforcement units. They are:

  • Asset Management
  • Market abuse
  • Complex financial instruments
  • Municipal securities and public pensions
  • Foreign Corrupt Practices Act (FCPA)
  • Cyber ​​Unit

If the SEC’s Division of Enforcement discovers suspicious circumstances after an initial investigation, it may proceed with formal securities enforcement action. If the SEC files a civil complaint, enforcement action may be brought in a federal district court. Alternatively, the SEC may file 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 securities laws to the regulation of brokerage firms and stock markets. Congress has authorized it to oversee securities trading platforms and participants in the securities industry. Congress created it in 2007 to succeed 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 ministry determines that further action is necessary, it may reach a settlement with the offending broker or company. Alternatively, FINRA’s Enforcement Department may file a complaint with the Office of Hearing Officers (OHO).

Commodities Futures Trading Commission (CFTC)

The Commodities Futures Trading Commission (CFTC) is responsible for overseeing US derivatives markets. It regulates the commodity futures and options markets under federal securities laws. Congress created it in 1974 to enforce the Commodity Exchange Act.

Although the CFTC regulates certain instruments that fall under the definition of a security, most of the instruments it regulates are not considered securities. For example, US federal securities laws exclude exchange agreements of the definition of “security”. Therefore, the CFTC regulates non-securities based swaps. Meanwhile, the SEC regulates security-based swaps.

The CFTC is made up of five commissioners appointed by the President of the United States. Commissioners serve staggered terms of five years. The CFTC has four main divisions:

  • Compensation and risk
  • Enforcement
  • Market monitoring
  • Market Players Division

Similar to other US federal securities law regulators, the CFTC’s Enforcement Division can investigate and prosecute individuals and entities for violations of the law.

Department of Justice (DOJ): No Criminal Prosecutions Under Securities Laws

Although not a securities regulator, the Department of Justice has broad powers and can intervene in matters involving securities laws. The DOJ often conducts investigations of potential violations of securities law at the same time as the SEC. The DOJ also regularly collaborates with the SEC on investigations. However, unlike the SEC, the DOJ does not have the power to bring criminal charges against violators of securities laws.

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