Federal and, in some cases, state laws prohibit fraudulent activities in selling securities. Investment professionals who commit such offenses will likely lose their licenses and face criminal penalties.
Functioning correctly, securities markets are an essential pillar of the American economy. But these markets can be abused. We have a complex regime of securities fraud enforcement to combat this.
The Securities and Exchange Commission is the government watchdog for the nation’s stock markets. It’s involved in every major financial misconduct case and is crucial to maintaining fair practices. It also brings forward multiple civil enforcement actions each year and works closely with the Department of Justice in criminal investigations.
The President chooses the SEC’s five commissioners with the advice and consent of the Senate. The commission consists of several divisions:
Among these are the divisions of corporation finance, economic and risk analysis, enforcement, examinations, and investment management. The latter includes regulating fund managers, analysts, advisors, and others in the investment industry. The enforcement division is responsible for investigating alleged violations of federal securities laws and bringing forward civil suits and administrative proceedings.
These proceedings can include permanent injunctions, disgorgement, civil penalties, penny stock bars, and officer-director or director-general bans. The commission also oversees and regulates the operations of brokers, dealers, and clearinghouses.
The SEC’s whistleblower program is another important source of incoming information for the agency, rewarding individuals who share information that leads to sanctions against financial industry violators. However, the commission could be in trouble if it continues to rely on this model rather than focusing on its core functions. This is especially true if Congress continues to be dysfunctional and the SEC is subjected to partisan pressure during the budgeting process.
The CFTC is charged with investigating and prosecuting alleged violations of the Commodity Exchange Act and Commission regulations. This includes various allegations involving market manipulation, false statements, and other fraudulent activities. It is not uncommon for large institutions to be the focus of a CFTC investigation. However, the CFTC can also investigate smaller operations such as private equity funds, hedge fund managers, and individual traders.
A recent US Court of Appeals ruling can potentially undermine Justice Department enforcement of insider trading, public corruption, crypto fraud, securities fraud, and other white-collar crimes. The ruling overturned convictions involving secretly leaked Medicare reimbursement rate information that two investors used to profit from shorting stocks of companies they knew would see their profits erode. The court ruled that this intangible information did not qualify as property under federal law.
The decision may signal a shift in how the government defines “property” for purposes of securities fraud prosecutions. Traditionally, the government has focused on hard assets like real estate, cars, and other physical goods. But the CFTC is now pursuing cases based on intangible data, such as business secrets, e-mails, and phone records. This raises questions about the future of the CFTC’s approach to these novel technologies and structures, and the limits of the Supreme Court’s PSLRA imposed on stringent pleading requirements for private plaintiffs seeking damages under securities laws.
The Financial Industry Regulatory Authority writes rules for its members to follow in conducting their business, including what kind of sales practices they can engage in with the investing public and what kind of supervisory and compliance systems they need. However, FINRA does not have the power to bring criminal charges against bad actors, and other regulators like the SEC or state-level securities authorities do have this ability.
FINRA usually has the first crack at the problem when a dispute arises between brokers, investors, and their firms. The organization offers arbitration and mediation services, and its settlement program resolves most disputes in a matter of days – much faster than the typical court case.
Moreover, FINRA also offers training to state securities examiners on how to conduct broker-dealer exams. And it sponsors several conferences to educate senior investors about the latest financial trends, scams, and other issues affecting them.
However, a lawsuit brought by Utah-based Alpine Securities is challenging the constitutionality of FINRA. If that lawsuit succeeds, it could halt FINRA enforcement decisions and set a precedent for future legal challenges to the regulatory body. The litigation could last years, but the effect would likely be felt sooner than that. The argument centers on FINRA hearing officers, essentially judges, who run the “trials” and issue judgments in disputes between FINRA and its members.
Founded by 24 stockbrokers who met under a buttonwood tree, the New York Stock Exchange (NYSE) is the oldest and most famous of the world’s stock markets. Its NYSE Composite and S&P 500 indexes are among the most widely used measures of the market.
NYSE is one of several exchanges comprising the NYSE Group, the American Stock Exchange, and NYSE Arca. These sister exchanges operate futures and options markets, bond trading, and all-electronic markets. They also have listing standards and policies that differ from the NYSE’s.
The SEC regulates the issuance and trading of equities, equity options, corporate bonds, municipal bonds, and derivatives. Its securities laws and rules cover many areas of the market, including requiring disclosure and accounting by companies that issue shares, the activities and organizations of the industry, and the operation of stock and options exchanges.
The SEC investigates and prosecutes violations of the securities laws. Its whistleblower rewards program pays large awards to individuals who provide information about financial fraud. In addition, the agency’s Fraud Section has negotiated landmark settlements with several major financial institutions relating to market manipulation. It has also convicted 12 commodities and securities traders at global financial institutions.