Regulation and the capital markets

- [Instructor] Regulation is crucial for every investor to be familiar with. Let's take a look at some of the primary U.S. securities regulators. So I want to start with the U.S. Securities and Exchange Commission, also called the SEC. The SEC is the primary overseer for U.S. capital markets. And I'm here at their website, sec.gov, and this is a great resource for investors to be aware of. There's a lot of information and data that's in here that can be useful. For example, one thing that I want to highlight here is EDGAR. EDGAR is a resource database where publicly traded companies put in their financial information, and then it's available for investors to kind of pull that information so they can learn about, say, company filings or review annual reports, prospectuses, any of that type of information. But what the Securities and Exchange Commission does, broadly speaking, is enforce and regulate the overall U.S. capital markets, and they do this through a combination of regional offices all around the country that oversee different aspects of the U.S. capital markets. The SEC relies heavily on what's often called the little brother of the SEC, which is FINRA, or the Financial Industry National Regulatory Authority. Now, FINRA is what's called an SRO, or self-regulatory organization. And essentially what this means is all large financial firms have to join FINRA as a member, and then FINRA itself advises on best practices, it can go through and it can cite different firms and say, "Hey, you're violating these rules, et cetera." FINRA's role is to make sure that its member organizations are all following the securities laws the SEC has put out or promulgated. FINRA doesn't necessarily have the power to go through and levy fines, or certainly put people in jail, but they can refer cases to the SEC. And then the SEC can prosecute those cases for things like, as an example, insider trading or front running, or any of the other numerous financial rules that are out there. Now, the SEC, as I mentioned, has different regional offices. And these regional offices are spread throughout the country. And I've actually done work for all of the different regional offices, but depending on the region in question, Atlanta, Boston, Chicago, et cetera, wherever you are in the country, you will have a regional office that is assigned to your area, and that regional office will have different focuses or priorities, depending on the nature of most of the financial firms they're overseeing. But one of the really nice things about the SEC is we know in advance upfront what they're concerned about. So the SEC goes through and conducts examinations, kind of reviews, if you will, of different financial firms to make sure that those firms are following the rules. And they put out every a guide talking about what their priorities are. So they tell you in advance, "Hey, these are the areas to make sure that you are really on top of the rules and make sure you're doing what you're supposed to be doing." For example, for 2025, they're here saying, "Hey, we're very concerned," as an example, "about, say, investment advisors, making sure that investment advisors are adhering to fiduciary standards of conduct. Make sure that they're acting in the best interests of clients. Making sure that compliance programs for advisors are up to snuff. Making sure they have everything that they're supposed to have in those compliance programs. Looking at advisors to private funds." This is really another name for hedge funds and private equity funds, and that's a whole other story, but there's lots of different areas the SEC might focus on, but they tell us upfront, "These are the areas that are of most concern to us." Now, does that mean that your firm couldn't end up being cited for something that's not in here? Well, of course not. Priorities can change and they might flag things that aren't a priority, but are still rule violations that you have to focus on. But upfront we know, hey, this is what they are going to be focused on from a regulatory point of view. So I've always thought this is a really helpful and useful tool the SEC provides to financial registrants. But that's FINRA and the SEC in a nutshell. They're going to be your two primary overseers for most capital markets needs. Now the third one that you'll often hear about is the CFTC. And the CFTC works hand in hand with the SEC, but they are having an increasingly large role in the crypto landscape. So this is an area that, particularly if you're in cryptos or some of the commodities or products like that, this is an area or a regulator that you'd want to be familiar with. The CFTC tends to be a little bit smaller than the SEC, but they're following the SEC's lead, right? The SEC is promulgating different rules and often takes the lead when there's kind of a hot button issue. Like as an example, when we had the GameStop and the meme stock trades being done, or about a decade ago or so, when we had the flash crashes occurring in the financial markets. So before that, the Great Financial Crisis. The SEC is often the one that is tasked by Congress with coming up with new rules to make sure that the financial markets remain stable and orderly. And that's really the goal of the SEC at the end of the day. They're trying to promote fairness and efficiency in the securities markets and to facilitate capital formation to allow companies to grow over time, and thus, support overall economic growth across the country. But those are your headline regulators that you should be familiar with if you're going to invest in the capital markets in the U.S.