🎯 In 30 seconds: The SEC is the federal agency that writes and enforces securities law. FINRA is the industry regulator, supervised by the SEC, that licenses and polices brokers. State securities regulators cover local firms and advisers. SIPC replaces missing cash and securities, up to $500,000 including $250,000 cash, if a member broker fails. Nobody protects you from a stock going down. Check every broker on BrokerCheck before you open an account.
Why the rules exist
When the stock market crashed in 1929, public confidence collapsed with it. Congress responded with the Securities Act of 1933, which requires companies selling shares to the public to tell the truth about their business and risks, and the Securities Exchange Act of 1934, which created the SEC.
The SEC sums up the goal of those laws in two ideas. Companies offering securities must tell the truth. People who sell and trade securities, meaning brokers, dealers and exchanges, must treat investors fairly and honestly.
Notice what is missing: no law promises you a profit, and no regulator approves an investment as "good". Regulators require disclosure and fair dealing. Judging the investment is still your job.
The SEC: the federal regulator
The U.S. Securities and Exchange Commission has a three-part mission: protect investors; maintain fair, orderly and efficient markets; and facilitate capital formation.
In practice it:
- Writes rules for exchanges, brokers, investment advisers, funds and public companies.
- Reviews company filings such as IPO prospectuses and annual reports, and publishes them free on EDGAR.
- Registers exchanges and oversees self-regulatory organizations like FINRA.
- Brings civil enforcement cases for fraud, insider trading, market manipulation and false statements. Criminal cases are brought by the Department of Justice, often alongside the SEC.
- Runs Investor.gov, a free education site, and takes tips and complaints from the public.
FINRA: the referee for brokers
The Financial Industry Regulatory Authority is a private, not-for-profit self-regulatory organization. It is not a government agency, but it operates under SEC supervision. Almost every brokerage firm that deals with the public must be a member.
FINRA:
- Writes and enforces rules for member firms and their registered representatives.
- Examines firms and watches market activity for manipulation and other misconduct.
- Gives the qualification exams, such as the SIE and Series 7, that people must pass to sell securities. See Careers in the markets.
- Disciplines firms and individuals with fines, suspensions or a bar from the industry.
- Runs the largest securities dispute resolution forum in the US, where most customer disputes with brokers are arbitrated.
- Operates BrokerCheck, the free lookup tool covered below.
Many rules you will meet in this course, such as the pattern day trader rule and margin maintenance requirements, are FINRA rules. See The rules every trader runs into and Margin.
States, exchanges and the rest of the map
- State securities regulators. Every state has one. They register smaller investment advisers and many local brokers, enforce state "blue sky" laws, and often move fastest on local scams. NASAA, their association, lists every state's contact.
- Exchanges. NYSE, Nasdaq and the others are also self-regulatory organizations. They set listing standards for companies and can halt trading in a stock.
- Futures and forex. Those markets are a different system: the CFTC and the National Futures Association. Stock rules and SIPC do not carry over. See Futures basics.
- Banks. Bank deposits are covered by the FDIC, not SIPC. A brokerage "cash sweep" may move your cash into a bank, where FDIC rules apply instead. Read the sweep terms.
SIPC: what it covers and what it does not
The Securities Investor Protection Corporation is a non-profit created by Congress under the Securities Investor Protection Act. Most US brokers must be members. If a member broker fails financially and customer cash or securities are missing, SIPC works to restore them.
The limit is $500,000 per customer, per capacity, including up to $250,000 in cash. "Per capacity" means different account types, such as an individual account and an IRA, can each have their own limit.
SIPC does not cover:
- A fall in the value of your investments. If you buy a stock at $50 and it drops to $20, that loss is yours.
- Worthless securities someone sold you, or bad investment advice.
- Commodity futures (outside special portfolio margining accounts), foreign exchange trades, and unregistered investments such as many crypto assets, even if held at a member firm.
Before SIPC is even needed, SEC rules require brokers to keep customer securities and cash separate from the firm's own money. SIPC is the backstop for when that fails, for example through fraud.
Worked example: two customers at a failed broker
Hypothetical. Broker Z fails, and records show assets missing from two customers' individual accounts.
| Customer A | Customer B | |
|---|---|---|
| Missing securities | $300,000 | $200,000 |
| Missing cash | $100,000 | $300,000 |
| Total claim | $400,000 | $500,000 |
| Cash covered (max $250,000) | $100,000 | $250,000 |
| SIPC protection | $400,000 (all of it) | $450,000 |
| Not covered by SIPC | $0 | $50,000 of cash |
Customer B is under the $500,000 total but over the $250,000 cash limit, so $50,000 is left as a claim against whatever remains of the failed firm. The lesson: large idle cash balances at a broker have less protection than securities.
BrokerCheck: check before you trust
BrokerCheck (brokercheck.finra.org) is free and takes two minutes. Search a firm or a person and you will see:
- Whether they are registered, and in which states.
- Licenses held and exams passed.
- Employment history in the industry.
- Disclosures: customer complaints, arbitrations, regulatory actions, firings and some criminal or financial events.
For investment advisers, who give advice for a fee, the SEC's Investment Adviser Public Disclosure site (adviserinfo.sec.gov) does the same job. If a person or app selling you investments does not appear in either, stop.
How to complain, in the right order
- Your broker first. Put the problem in writing to the firm, then escalate to the branch manager or compliance department. Keep copies of everything, including screenshots and trade confirmations.
- FINRA. If the firm does not fix it, file a complaint through FINRA's online complaint center. FINRA investigates and can discipline firms and brokers. To try to recover money, the usual path is FINRA arbitration, which has its own filing rules and deadlines.
- The SEC. Submit tips and complaints about fraud, manipulation, insider trading or misleading company statements through the SEC's tips, complaints and referrals portal (sec.gov/tcr).
- Your state securities regulator. Find it through NASAA. Especially useful for local advisers and small firms.
- Online fraud. If you were scammed through a website, app or social media, also report it to the FBI's Internet Crime Complaint Center (IC3).
Act quickly. Arbitration and legal claims have time limits, and scammers move money fast. If you think you were defrauded, the site's money theft help page walks through the first steps.
Try it
Look up the broker you use, or the one you plan to use, on BrokerCheck. Write down its full legal name, its clearing firm, how many disclosures it has, and what the most recent one was about. Then confirm both firms on SIPC's member list. Keep the notes; you will use them again in Choosing a broker.
- What is the SIPC limit if a member broker fails? Answer: $500,000 per customer, per capacity, including up to $250,000 in cash.
- You buy a stock at $50 and it drops to $20. Does SIPC cover the loss? Answer: No. SIPC never covers a fall in the value of your investments.
- Your broker fails and your individual account is missing $200,000 of securities and $300,000 of cash. How much does SIPC protect? Answer: $450,000. The $50,000 of cash above the $250,000 cash limit is not covered.
- Is FINRA a government agency? Answer: No. It is a private, not-for-profit self-regulatory organization that operates under SEC supervision.