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Who Regulates the Stock Markets?

This question arises, most importantly, with two types of individuals. The research students who desire to do research on the subject of stock market. Apart from the buyers and sellers of the stocks, they need to know who regulates the stock market. The other category is those who suffer losses in the stock market, which normally an investor attributes to the wrong advice that he received from his brokers. Brokers, often, deliberately mislead the investors, for their private gains. When the investor raises the dispute with the broker, it has to be solved as per the guidelines laid down by the regulating authority.

Even with the strong arm of law, various rules and regulations that  control the Stock Market, frauds of enormous magnitude have taken place recently which make an investor wonder whether the regulatory mechanism is in the proper place or not! Take a look at the corporate scandals relating to WorldCom and Enron. Why the system failed to challenge them well in time and watched helplessly as many thousands of investors who trusted these companies had to hoist the white flag of surrender? The Federal Government had to come to the rescue of some of the prestigious Banking Institutions, with dole-outs, to avert further damage to the American economy.

Good rules are good, only when they are implemented by honest individuals. Pre-planned and well-thought-out schemes (scandals) can rock the best set of rules and fox the ideal system.

A complex regulatory system to take care of the interest of the investors is in place and yet….

A good investor needs to have an understanding of the functioning of the stock market, including its regulatory aspect. After the great depression of 1929, (when sell orders flooded the stock market on October 24, 1929—known as “Black Thursday) with the total collapse of the stock market, the Securities and Exchange Commission (SEC), a federal agency, was formed in 1930, to oversee the functioning of the stock markets. Its main concern is to protect the investors. Stocks are regulated by:

Congress:

Congress is the supreme authority to regulate the US Stock Markets. It has passed the following laws/laws relating to:

  1. Securities Act of 1933
  2. Accounting Reform and Investor Protection Act of 2002.
  3. Overall control of the budget of SEC and other federal and associated agencies.

The Securities and Exchange Commission

This is the top regulatory body that takes care of the U.S. Stock Markets. At the listing stage, NYSE puts its seal on a particular share of the company by applying strict standards. To be a member of the Stock Exchange a firm must purchase a seat in the exchange. The qualifying standards looked into are, levels of profit margins, market value of shares, number of stock holders, number of shares issued to public, tangible assets etc. The SEC has the power to veto any application for membership.

National Association of Securities Dealers

Next to the SEC in the regulatory order is the National Association of Securities Dealers. This is a self-regulatory body that supervises the practices of security dealers. On passing the National Association’s examination, a security dealer will be issued a license to sell securities. Such a dealer will be under the close scrutiny of NASD and any dealer found violating the rules, is liable for suspension and his license will be revoked.

State Legislators

State Legislators regulate how securities are sold in their respective states. This applies more stringently, if the issuing entity is registered in that State.

FINRA

The Financial Industry Regulatory Authority (FINRA) was formed in 2007 after merging together the National Association of Securities Dealers (NASD) and the regulatory arm of the New York Stock Exchange (NYSE).This body is also overseen by SEC. It is responsible for supervising all U.S. stockbrokers and brokerage firms.

Brokerage Houses

Brokerage houses are interested in building up their reputation and to win the confidence of the investors on a long-term basis. It is, therefore, in their own interest that they follow all the rules and regulations scrupulously. They have a good internal management/audit system, so that the investors get flaw-less service.

In case of a complaint

Send the initial compliant to NASD. They will take up the issue with the concerned brokerage house. You may also address a complaint, if a procedural issue is involved, to the local State legislators.

The procedures are perfect

Procedure wise, the chain of systems that govern the functions of stock exchange are flawless. The market is in two parts. The primary market is where offerings of stocks originate; the secondary market is the trading centre, where buying/selling transactions are put through. This trading centre does not refer to a particular place, for most of the trading activities are conducted through the internet, and thus each participating computer is a trading centre. When a new offering is made by the existing company or a new company issuing shares for the first time, they are required to file a registration statement, which includes a detailed prospectus. The intending investors are liable to be given on demand, a copy of the prospectus, to enable them to make a decision about the purchase of the new issues.

On completion of the procedural aspects in the primary market, a stock enters the secondary market to participate in the buying and selling activities, in a recognized stock exchange. The trading can also be done through OTC (over-the-counter) market. Listed stocks are traded in the stock exchanges where the unlisted ones are traded over-the-counter. Listing is done for the most actively traded shares.

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