RoE Enforcement
Market Regulation

Role of an Exchange: Enforcement

One of the core missions of any securities exchange is investor protection. @Nasdaq protects investors in a variety of ways, including through its investigation and enforcement program.

One of the core missions of any securities exchange is investor protection. But how exactly does an exchange protect investors? As you’ve read here, Nasdaq protects investors in a variety of ways, such as through surveillance of market activity and monitoring listed company compliance with listing standards. Another key way that Nasdaq protects investors is through its investigation and enforcement program.

Nasdaq is what’s called a Self-Regulatory Organization, or SRO. Federal securities rules implemented by the Securities and Exchange Commission obligate SROs to regulate those market participants (its members) who trade on their stock exchange. That means that SROs must draft trading rules and discipline their members when they violate those rules or the federal securities laws. An array of trading rules exist that govern exchange conduct. Among the most important are those that prevent manipulative trading practices and require firms to abide by just and equitable principles of trade.

The SEC allows SROs to delegate some or all of their disciplinary responsibility to a regulatory service provider, known as the Financial Industry Regulatory Authority, or FINRA. FINRA is a government-authorized not-for-profit organization that oversees U.S. broker-dealers. While Nasdaq delegates some investigation and enforcement responsibility to FINRA, it retains responsibility for those areas where Nasdaq’s in-depth knowledge of its markets and members enhances market regulation.

Nasdaq only has jurisdiction over firms and individuals that are member of our exchange. If Nasdaq suspects that one of its members is violating a rule or a securities law, it will investigate. SROs such as Nasdaq have many tools at their disposal to investigate potential misconduct. For example, they can send requests for information, access market data, or conduct interviews. Firms must cooperate with those requests or face disciplinary action if they fail to do so.  Once an enforcement investigation is complete, an assessment is made on how best to discipline the member if it is determined that there is a violation. A disciplinary action might be informal (such as a letter of caution warning the firm) or formal. Formal action typically involves a negotiated settlement that results in a monetary sanction. SROs also have the authority to suspend or bar an individual from the industry if the circumstances warrant it. Sanctions are meant to be proportionate to the misconduct and harm caused, severe enough to deter future misconduct, and tailored to remediate the flaws that led to the misconduct.

You might be thinking, how does collecting fines for misconduct protect me, the ordinary investor? In our view, it’s simple. SROs levy sanctions to deter bad behavior. Those outcomes are publicized for all to see.  When market participants know that they will be fined or lose their livelihood for breaking the rules they’re more inclined to play by them. A marketplace free of bad actors in turn makes it more likely that the value of your 401K is driven strictly by market forces, not manipulation. That increases confidence in the market, thereby protecting you, the investor.

Nasdaq, Inc. intends for this website to serve basic educational purposes only. Information contained herein should not be construed as investment advice, either on behalf of a particular security or as an overall investment strategy. Neither Nasdaq nor any of its affiliates makes any recommendation to buy or sell any security or any representation about the financial condition of any company. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. Nasdaq does not represent or warrant that any Investors should undertake their own due diligence and carefully evaluate companies and applicable laws before investing. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.