SEC | The U.S. Financial Regulator

Description and functions of the SEC

The U.S. Securities and Exchange Commission (SEC) is one of the 4 primary U.S. regulators and has the broadest powers to regulate the country’s financial sector. The regulator was created in 1934 and cooperates closely with government authorities. The Commission’s executives are appointed by the U.S. President and approved by the Senate. One of the regulator’s main objectives is to set and enforce securities registration and compliance with its rules. The SEC oversees all companies, brokers, and investment and insurance funds that trade securities and derivatives in the exchange market. Recently, the regulator has also begun seeking leverage over the cryptocurrency market. Since 2008, the trading of CFDs (contracts for price difference that are popular in Forex ) in the USA has been strictly limited or banned.

Tasks and purposes of the SEC in the Forex market:

• Enforce federal laws regarding financial markets.

• Control the disclosure of corporate information that licensees must provide to investors.

• Oversee private regulators and auditors.

• Stop violations of clients’ rights and conflicts of interest.

• Stop manipulations involving affiliated entities or financial statements.

• Ensure that licensees operate transparently.

• Supervise corporate acquisitions.

• Develop legislation that regulates the issuance and turnover of securities and related assets.

• Ensure that the U.S. securities market information is updated promptly. Inform investors and licensees’ clients about their rights, options, risks, etc.

The SEC controls all U.S. financial market participants: stock and commodity exchanges; over-the-counter (OTC) markets; all issuers of securities (shares, bonds, derivatives); hedge funds and asset management companies; exchange-traded, investment, retirement, and insurance funds; and all brokers and investment banks. Any transaction with securities is subject to supervision. The SEC also oversees investors. Every private investor that buys over 5% of shares of a company quoted on U.S. exchanges must register with the Commission.

To obtain an SEC license, a broker has to:

• Register with FINRA and NASAA¹.

• Pass qualification tests.

• Comply with the Commission’s regulations. In particular, the SEC prohibits its licensees from cooperating with clients and investors from some countries and regions, such as Iran, Sudan, North Korea, and Crimea.

There are separate requirements for each type of activity that can be reviewed on the regulator’s website. Outside the U.S., the SEC is also one of the most influential regulators. It has over 4,500 people on the staff, 5 departments, more than 20 offices, and 10 regional branches across the USA.

Official website and available information

Overview of the SEC website:

• Upper main menu.

  

  Upper main menu

  ¹FINRA – The Financial Industry Regulatory Authority;

  NASAA – The North American Securities Administrators Association

• An information section that consists of several parts and provides a brief description of the regulator’s primary objectives,: which are to inform and service consumers, enforce federal laws, regulate markets, etc. Here you can also find the latest legal proceedings, investigations, and news.

  

  An information section

• Footer. It partially repeats information from the upper menu and includes contacts and the site map.

  

  The Footer

Main menu structure:

• About the SEC. Information about the regulator’s objectives, tasks, and management team.

• Divisions & Offices. The Commission has several departments responsible for separate fields of supervision. This section contains contact information and links to the Commission’s divisions and offices.

• Enforcement. Investigations, administrative proceedings, information for harmed investors, etc.

• Regulation. Principles and guidelines.

• Education. Information for novice investors.

• Filings. Licensees' documentation, EDGAR² search rules, and requests for public information about licensees.

• News. An information section about current events, changes in regulations, etc.

“Filings” and “Enforcement” are the most important sections for investors. “Filings” feature the rules for using EDGAR. All this regulator’s information about its licensees is public. Every investor can find licenses, statements, information about securities, and a lot more. The “Enforcement” section features links, filters for searching for investigations, and complaint submission forms.

How to confirm a broker’s license on the SEC website

The U.S. system for registration and licensing differs drastically from the European system. The U.S. market is strictly structured and regulated not only by special laws, but also bylaws. Finding information about a broker by its name or license number is not enough. You also need to understand what this information means and how it can help a trader.

To confirm a broker’s license on the SEC website, do the following:

Option A:

• 1

  Find an SEC-licensed broker. It is preferable to know the license number or other details by which the license could be found on the SEC website. Redirection is even better. The license number can be in the About Us the SEC section or the footer of the broker’s website.

  ²EDGAR – the Electronic Data Gathering, Analysis, and Retrieval system

  

  Information about SEC regulation in the footer of the website

• 2

  Go to the SEC website via the link and find the license by the broker’s legal name.

  

  The information about broker’s licence on the SEC website.

• 3

  View the information. In this case, the document includes the date until which the SEC can refuse to register the broker after reviewing the Form ATS-N.

  

  The information about broker’s licence

  Form ATS-N comprises 21 pages and contains a few dozen questions.

  

  Form ATS-N

Option B:

• 1

  On the SEC website, go to “Company Filings”.

  

  The SEC website

• 2

  Click “More Options”.

  

  Company Filings section

• 3

  Enter the broker’s legal name or other details.

  

  EDGAR Company Filings

• 4

  Review the results.

  

  The results of searching

The broker has a Central Index Key (CIK) number that is uniquely assigned by the SEC. It means the company is registered with the SEC and has an individual number by which the broker’s documentation can be found in EDGAR.

Commission’s basic requirements for brokers

Basic requirements to obtain a license:

• Fully disclose information about the company, its operation, plans, and risk management system.

• Register with authorities associated with the SEC.

• The broker’s executives must confirm their qualifications.

Brokers must operate as transparently as possible and meet the regulator’s requirements. The SEC can raise claims in cases of manipulations with liquidity or segregated client accounts, withheld information that could influence a trader’s decisions, misinformation, fraud, etc. The Commission’s objective is to protect the rights and interests of traders.

SEC license | Pros and cons

An SEC license is a broker’s pass to U.S. markets. For European brokers that are not going to operate in the USA, obtaining an SEC license makes no sense, as it would be uneconomic and would take away several competitive advantages due to the strictness of its requirements. But without an SEC license, a broker does not have the right to operate in the USA. That is why brokers do the following. They open several branches and obtain licenses from several regulators. A broker’s division in the U.S. acquires an SEC license and renders securities trading services in the exchange and OTC markets. A European division acquires a license from CySEC, the FCA , or BaFin and offers CFD trading, which is practically prohibited in the USA. A trader should make sure that the license corresponds to the broker’s division with which he concludes an agreement.

Advantages of trading with an SEC-licensed broker:

• Access to the U.S. stock market. Due to the closed nature of the country’s financial system, brokers with licenses from other countries cannot operate in the USA. Their clients don’t trade actual securities, but CFDs on securities. However, if a broker has an SEC license, it can provide real assets for trading.

• Segregation of accounts. Punishment for violating the account segregation rules is strict – the license is revoked.

• Brokers are audited by the “Big Four” accounting firms. A system of private regulators and auditors is also developed in the USA.

An SEC license confirms that the broker is registered in the U.S., has a CIK number, is in the EDGAR database, and is registered in databases of other regulators. A trader only has to understand which types of services the broker can render in compliance with the license.

Disadvantages of trading with an SEC-licensed broker:

For a trader, an SEC license means more expenses that are partially passed on to him by the broker. Stock market participants pay repository, exchange, and clearing fees and have to cover contributions to the regulator. The U.S. has an investor grading system intended to prevent novice investors from putting all their money into high-risk assets. To obtain a status analogous to “a qualified/accredited investor”, a trader has to show an annual turnover of at least $200,000 and confirm his qualification. Without this status, traders are granted limited access to assets and leverage. Becoming a market participant may cost several thousand U.S. dollars.

SEC jurisdiction

The SEC is a government regulator that supervises the whole U.S. stock market and controls all exchange and OTC transactions with assets defined as “stock instruments”. The Commission cooperates closely with other government and non-government regulators (such as the CFTC³ and FINRA), can get information from the Federal Reserve and the FBI, and works with whistleblowers.

An SEC license only applies to the USA. Most brokers with registrations and licenses from other countries are prohibited from providing services in the USA. In the same way, there are limits on operating in Europe for U.S. brokers with SEC licenses.

Submission and consideration of complaints

The SEC website offers various ways to file complaints: through social media, at an address included in the website’s footer, and with separate departments and offices depending on the type of complaint and the investor’s location. The SEC considers complaints by private traders and offers monetary awards to everyone who can point at law violations by brokers. Below is an optional method.

• 1

  In the main menu, go to “Enforcement” and select “Information for Harmed Investors”.

  

  Information for Harmed Investors

  ³The CFTC – The Commodity Futures Trading Commission

• 2

  In the left menu, select “Tips & Complaints”.

  

  Tips & Complaints

• 3

  Read the recommendations.

  

  The recommendations

The two previous screenshots show recommendations and links to complaint submission forms. A section in which you can file a complaint is in the screenshot below.

Complaint submission form

How to research an SEC-licensed broker

In this section, you can view all valid licenses held by brokers, including SEC licenses. Every month, TU’s analysts visit regulators’ websites and update information in broker reviews. If a broker has several licenses, you don’t need to look for information about them on several websites. You don’t need to compare legal names in an offer and license. TU’s analysts do all this for you. And if a regulator publishes a warning to a broker, you will learn about this at once.

Reviews of the SEC by complaining investors and traders

This is what private traders think about the SEC.

Anton, trader, St. Petersburg
I haven’t heard about any other regulator as much as I’ve heard about the SEC. There are hundreds of stories on the internet about the way the Commission works. For me, this is the main reason to trust SEC-licensed brokers.

Sergey, trader | Vladikavkaz, Russian Autonomous Republic of Alania
An SEC license is great, but only U.S. brokers can have it. For our traders, it’s easier to trade CFDs on currency pairs or stocks with traditional brokers and pay minimal fees. Initial deposits aren’t high and leverage isn’t 1:20 like in the USA. And for those who want to buy stock indexes or Facebook shares directly, there is FinEx ETF (exchange-traded funds). The SEC is for U.S. residents only.

Roman, cryptocurrency trader, Moscow
I think the SEC is a manipulator. I’ve been dealing with crypto for more than 3 years and I haven’t seen the Commission do anything good – they only get in the way of making money. Here’s why I think so:

• As before, the cryptocurrency market works without any regulators. All the Commission's attempts to prohibit something are like fighting windmills. Crypto develops at a huge speed. ICOs (initial coin offerings) were followed by DeFi (decentralized finance) and IDOs (initial coin offerings on decentralized exchanges). The SEC has no control over these processes, but tries to intervene.

• There are hundreds of fake crypto startups! Where is the regulator? I would understand if the SEC admitted they couldn’t do anything and didn’t intervene. But the regulator keeps getting involved. Consider complaints against Ripple in 2021, for example. The case went to court where it will probably stay for several years. Does anyone benefit from that?

• On many occasions, the Commission’s allegations stirred the pot. And it seems like it all was done solely to increase crypto’s volatility so that someone could profit from it.

Cryptocurrency laws still haven’t been developed in the USA. Bitcoin ETF is another long story in which the SEC keeps having difficulties. In summary, the SEC may be useful in the stock and currency markets, but as far as crypto goes, the Commission causes nothing but trouble.

Igor, trader, Moscow
The thing I like the most about the U.S. regulatory system is its closed nature. European Forex brokers acquire offshore licenses and it supposedly means they are licensed and can render services to residents of Europe and Asia. This is partially true, but, in Europe, they are simply not controlled by anybody. In the U.S., no broker can operate without an SEC license. The regulator doesn’t let any strangers into its territory; you either get a license or don’t work there. While a broker with an FSC Belize license, for example, can provide services to residents of Russia, U.S. brokers work with non-residents only through an “introducing brokers” program. The SEC doesn’t care whose license a broker holds. Licensing in the U.S. is mandatory. And for European brokers, obtaining an SEC license and not operating in the U.S. makes no sense; it’s too expensive. In short, regulation in the USA is truly reliable. But considering the fees, trading in the U.S. market is costly for ordinary traders like us.

Constantin, trader, Kharkiv
I agree that, on the internet, there are a lot of examples of the Commission’s positive work. But for every 10 small victories, the SEC has 1 big failure. For example, in 2011, the regulator missed violations and bankruptcy of MF Global, the 7th largest U.S. broker by the value of assets; and not just missed it. The broker played too long with government debt instruments to which it had access through repurchase agreements. As a result of a crisis in Greece that affected other European countries, MF Global had insufficient proprietary assets to cover the debts and used client money, breaking the client funds segregation rule. The SEC didn’t notice the risks or the segregation rule breach. Consequently, $700 million went missing from clients’ accounts. MF Global had $41 billion worth of assets and a $39.7 billion debt. Plus, the broker’s auditor was PwC, one of the “Big Four” accounting firms. Neither the auditor nor the regulator noticed anything askew.