Investing 101 - Click Here!

In the financial services industry, consumers pay a fee for a service and expect a certain level of security in return. When an investor pays a broker to handle his or her accounts, the broker is obligated to act in that investor's best interests. This obligation is not only moral, but also arises from the rules set forth by the industry's various regulatory agencies. The problem is that if an account is mishandled, most consumers have no idea where to turn until it's too late.

Examples of mishandling range from churning to suitability to fraud.
Churning is an unethical practice employed by some brokers to increase their commissions by excessively trading in a client's account. Suitability relates to the types of investments chosen for the account and whether they are appropriate for a particular investor, while fraud can encompass a wide range of behaviors with varying levels of severity.

So who is looking out for the average investor? Is it the Financial Industry Regulatory Authority (FINRA), the state regulatory agencies, the Securities and Exchange Commission (SEC), the Office of the Comptroller of the Currency (OCC) or the Federal Reserve Board (FRB)? The answer is all of the above, but each in its own way. Read on to learn more.

For most consumers, FINRA, the agency that governs business between brokers, dealers and the investing public, is the first line of defense in the event of a problem associated with an investment account.

When an investor opens an account at a U.S.-based brokerage firm, the fine print in the lengthy account-opening document typically stipulates that consumers give up their rights to pursue the brokerage company in a venue outside arbitration. Under FINRA's rules, however, the consumer maintains the right to pursue arbitration. As a result, the lion's share of consumer complaints against brokerages is fielded by FINRA and is usually arbitrations.

Arbitrations are basically court-like settings where judges are replaced by a panel of peers. Cases are presented by claimants (plaintiffs), with or without their attorneys, and are defended by respondents (defendants), who typically have attorneys.

The process begins by filing a claim with FINRA, which then notifies all parties involved that proceedings have begun. Arbitration is designed to be simple in order to accommodate the average consumer lacking legal expertise and allow him or her to file a claim without the need to hire an attorney. The forms are written in plain language so as not to discourage someone from filing.

However, while the initial filing can be processed without an attorney, it is widely suggested that the claimant (plaintiff) hire an attorney as he or she will encounter a barrage of deep-pocketed legal defense maneuvers once the claim is filed. There is no shortage of legal services available for claimants, and many attorneys will take cases on contingency, especially if there is a large potential settlement and what they feel is a good chance of winning.

While the arbitration process is effective and orderly, consumers pursuing a case should be prepared for the same time lags they would experience with a typical state or federal court case. The filing process can take up to one year and proceedings after the initial filing can take years.

Because the process can take a significant amount of time and resources, it is highly recommended that consumers that have been treated unfairly exhaust all measures for handling grievances directly with their broker or investment manager prior to filing a complaint with FINRA. (For further reading, see Investigating The Securities Police.)

State Regulatory Agencies
While FINRA fields the majority of complaints from investors, there are other lines of defense with overlapping powers. For instance, each state has its own regulatory agency to police the in-state activities of the securities industry. While a state's regional jurisdiction is defined by its own state lines, its professional jurisdiction varies.

Typically, the state polices a variety of financial services providers ranging from credit unions to broker dealers. State agencies also cover investment advisors that fall below the requirement for filing with the SEC (less than $25 million under management). Here, the coverage that state agencies provide is similar to the SEC's duties of licensing, filing and auditing. Regulatory overlap is usually avoided as registered investment advisors only register under one agency or the other.

The state typically gets involved early in an investigation and then cooperates with the SEC as the investigation deepens. While effective, the state agencies are not usually as well staffed as FINRA or the SEC and have to cover a larger caseload per investigator.

The glue that holds the investor protection system together is the SEC, which arose from the ashes of the 1929 stock market crash and was crafted around the Securities Act of 1933 and the Securities Exchange Act of 1934. The SEC governs the self-regulatory organizations (SROs) that reach down to the consumer, and its jurisdiction is far reaching, covering four main divisions:

The SEC's responsibilities have become ever more challenging with the advent of computer-based crimes and the increasing complexity of financial products and transactions, but its primary purpose is still to protect the individual investor by watching over the investment management industry and ensuring that public companies provide sufficient financial and other information to the public to allow investors to make informed decisions.

With the new challenges in the marketplace, there has been a call to increase the flexibility of the SEC's power. However, despite years of discussions about consolidating regulatory bodies or appointing a finance czar, there are no concrete plans in the pipeline. (Learn more about how this regulatory body protects the rights of investors in Policing The Securities Market: An Overview Of The SEC.)

The OCC and the Fed
There are two other regulatory bodies spoken of frequently, the less common Comptroller of the Currency (OCC) and the famous (or infamous) Federal Reserve Board (FRB). While both of these bodies are very active in watching out for investors, their activities are focused on banking and financial services at a higher level, and their involvement in individual cases is rare.

Each of these regulatory bodies looks out for investors in its own way, and each has its specific duties with some overlap. The regulatory organizations have become increasingly sophisticated to accommodate increasingly complex investment transactions and products, but are challenged each year as new issues arise. These organizations are designed to protect consumers, so if you have a problem that you aren't able to resolve directly with your broker, take advantage. Remember, just like your local police, the regulatory agencies won't know about any issues unless you contact them.

Investing 101 - Click Here!

Related Articles
  1. Investing News

    Obama Wants to Double Wall Street Regulation

    President Obama wants to double the budgets of the SEC and the CFTC over the next five years.
  2. Taxes

    Why People Renounce Their U.S Citizenship

    This year, the highest number of Americans ever took the irrevocable step of giving up their citizenship. Here's why.
  3. Personal Finance

    What it Takes to Get a Green Card

    Grounds for getting a green card include having family members in the U.S., being a certain type of refugee or specialized worker, or winning a lottery.
  4. Investing News

    What's the Fed Going to do in 2016?

    Learn about the factors that contribute to increases in the federal funds rate by the Federal Reserve and key economic indicators for 2016.
  5. Investing News

    ABC's Madoff Miniseries Explores His Charm, Smarm

    An ABC miniseries on Ponzi scheme king Bernie Madoff gets inside the head of a man who was, in fact, not too big to fail.
  6. Career Education & Resources

    Laws & Regulations To Know Before Changing the Name of Your Business

    Discover some of the most important steps you need to take after making a decision to change your legally established business name.
  7. Personal Finance

    Passport Procrastinators: This Year, Renew Early!

    Millions of passports issued nearly 10 years ago when the Western Hemisphere Travel Initiative became law are expiring. Expect backlogs; leave extra time.
  8. Economics

    How Interest Rates Affect The U.S. Markets

    When indicators rise more than 3% a year, the Fed raises the federal funds rate to keep inflation under control.
  9. Economics

    Forces Behind Interest Rates

    Interest is a cost for one party, and income for another. Regardless of the perspective, interest rates are always changing.
  10. Markets

    The (Expected) Market Impact of the 2016 Election

    With primary season upon us, investor attention is beginning to turn to the upcoming U.S. presidential election.
  1. How does the Wall Street Journal prime rate forecast work?

    The prime rate forecast is also known as the consensus prime rate, or the average prime rate defined by the Wall Street Journal ... Read Full Answer >>
  2. What is a basis point (BPS)?

    A basis point is a unit of measure used in finance to describe the percentage change in the value or rate of a financial ... Read Full Answer >>
  3. What is the Writ of Mandamus?

    A writ of mandamus is a court order issued by a judge at a petitioner’s request compelling someone to execute a duty he is ... Read Full Answer >>
  4. Are hedge funds regulated by FINRA?

    Alternative investment vehicles such as hedge funds offer investors a wider range of possibilities due to certain exceptions ... Read Full Answer >>
  5. Are UTMA accounts escheatable?

    Like most financial assets held by institutions such as banks and investment firms, UTMA accounts can be escheated by state ... Read Full Answer >>
  6. What is the SEC's escheatment process?

    The U.S. Securities and Exchange Commission (SEC) does not have its own escheatment process. Rather, the SEC notes that the ... Read Full Answer >>
Hot Definitions
  1. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  2. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
Trading Center