Who regulates advisors and stockbrokers?

Broker/dealers, stockbrokers, investment advisor, planners and professional who sell stocks and bonds are all regulated by both state and federal governments.    In financial situations, a “broker” is a person or business that sells securities on behalf of others (“customers”).  A   “Dealer” is a person or business that sells securities for itself.  So, for example, when underwriting the  stock of an initial public offering (“an IPO”) a firm acts as a dealer.  When recommending that its customers purchase such  stock, the firm is operating as a broker.  Both activities are highly regulated.

The 1934 Securities and Exchange Act required both brokers and dealers to register, and requires that all agents for it also pass examinations, in order to sell various types of securities.  The SEC is the federal agency charged with enforcing the broad mandates of the statute. It, in turn, has delegated many regulatory duties to the Financial Industry Regulatory Authority (FINRA).   Its job as a “self regulatory agency”, paid for by fees assessed to broker dealers, is to establish and conduct qualifying examinations, to maintain a database of customer complaints and regulatory actions against brokers and broker dealers, and to protect the investing public.

Www.FINRA.org operates a free, online “broker check” service.  Anyone choosing a new financial advisor should use this.  Every  “Registered representative” (stockbroker) is listed, and their previous jobs, all exams they have taken, and any complaints or regulatory problems they have had are available to the public.  It is searchable by name,  zip code and state.  This free service is worth a lot.   It can steer customers away from brokers with suspensions, complaints, or who are not fully licensed.  Typically, a broker should have at least a series 7 in order to sell most stocks and bonds.    Unfortunately, without checking “broker check” an investor might rely on the advice of someone who is only licensed to sell annuities and insurance products, with high commissions and fees, who is not even legally licensed to recommend stocks or bonds.

In addition to regulation by the SEC and FINRA, brokers who recommend commodities must have a series 3 registration to sell commodities and futures contracts.  The National Futures Association regulates the retail commodities business.   It also provides free, online registration and complaint information about commodities brokers and dealers.

All states also have passed anti fraud statutes, making it unlawful to mislead or defraud investors.   Most states have a “Securities Commissioner” whose agency also licenses brokers who wish to sell securities to residents of that state. These offices also are active in investigating complaints against a person or firm selling stocks and bonds.  State offices are a good source of information for investors deciding to whom to entrust their savings.   The first tier question is to make sure the investment professional is licensed to do business in the state.  In addition, any complaints, investigations or arbitration awards against the person should be weighed in deciding who to trust.

SIPC also provides insurance for investors against theft by a registered broker, dealer, or their representatives.   The law as to what constitutes “theft” under SIPC is not straightforward, and any investor whose broker fails to exercise a sell order, or whose broker is running a “Ponzi scheme” should immediately seek legal counsel.

For a free initial consultation, contact Diane Nygaard at (913) 485-5014 or click here to send an e-mail describing your problem.