Transcripts

How Wall Street Works - Securities Regulation

PAUL KANGAS: Now you may have heard claims that the markets are rigged or crooked. Like any place where a lot of money is at stake, Wall Street has its share of greedy and unscrupulous individuals. But as Stephanie Dhue reports, there are rules that apply to anyone who is involved in securities trading.

STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: The U.S. Securities and Exchange Commission is Wall Street's top watch dog. Established by Congress with the 1934 securities act, the agency sets the rules and is on the lookout for securities fraud -- things like stock price manipulation through false information or trading on information not available to the public, better known as insider trading. SEC Chairman Christopher Cox says the commission has a wide-ranging mandate to protect investors.

CHRISTOPHER COX, CHAIRMAN, SECURITIES AND EXCHANGE COMM.: Congress chartered this agency to make sure that in the more specialized world of investing, there were law enforcement people who would keep track of markets, make sure those markets were orderly, make sure that trading in them was honest and make sure that investors at all times have access to timely information about the terms of their investment.

DHUE: The SEC requires companies file periodic financial reports and notify investors of news events that impact the bottom line. Investors can look up those reports online using the SEC's Edgar system. The SEC also monitors stock market activity. Experts here are looking for unexplained price moves. The SEC has the power to halt trading in a stock if it suspects illegal activity or that investors have been kept in the dark about important corporate developments.

COX: Information -- quality information, including financial disclosure -- is what separates investing from roulette.

DHUE: The SEC has strict rules for stockbrokers, which the agency calls broker-dealers. Brokers are also policed by the industry's own regulatory group, the financial industry regulatory authority, or FINRA. Mary Schapiro heads up this organization. She notes that FINRA maintains a broker-check system, which allows investors to look into the background of any stock broker.

MARY SCHAPIRO, CEO, FINANCIAL INDUSTRY REGULATORY AUTHORITY: We maintain a central repository of information about brokers and investment advisors that includes their qualifications, the places they've worked. For example if somebody has moved brokerage firms once a year for the last several years, that's a red flag. You might want to understand why they've been moving around a lot.

DHUE: The database also includes any disciplinary actions and complaints registered about a particular broker. FINRA urges investors to check out a broker's record before coming his or her client. To use the broker check system, you can go online to the finra.org web site or you can call 800-289-9999. To avoid fraud in securities trading, regulators say it's important to use an established brokerage and deal only in registered stock or bond offerings. Those can be verified with your state security agency before you put any money down. But if you believe you've been misled or taken advantage of, you can file a complaint with Federal, state and industry regulators. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.