The difference between the NASD and the SEC

Some investors aren’t clear on the difference between the SEC and the NASD. They both are involved in upholding the integrity of the financial markets.

The SEC

The SEC is the Securities and Exchange Commission. It is part of the federal government and its purpose is to ensure fairness in the securities and exchange markets. Congress created the SEC during the Great Depression, after investors had lost millions in the stock market crash, which was blamed partly on unscrupulous stock promoters during the 1920s.

Two of the most famous laws of all time, the Securities Act of 1933 and the Securities Exchange Act of 1934 were passed. The SEC was established to restore and maintain investor confidence in the markets. Corporations that issue securities were required to reveal the financial picture of their businesses to investors. Brokers, dealers, and exchanges were required to treat investors fairly.

Therefore the SEC is mainly charges with protecting investors. The commission is overseen by five commissioners, appointed by the President with Senate approval. Congress grants an annual budget for the commission, which is headquartered in Washington with regional offices throughout the country. Each year the SEC brings between 400-500 civil enforcement actions against individuals and companies that break the securities laws. Typical infractions include insider trading, accounting fraud, and providing false or misleading information about securities and the companies that issue them.

The Division of Corporation Finance oversees corporate disclosure of important information to the investing public. As an investor, you may hear about annual and quarterly filings (Forms 10-K and 10-Q). These are documents submitted by corporations to the SEC. The commission also reviews annual reports to shareholders and registration statements for new securities (e.g. initial public offerings.)

State regulation of investment advisers

The NASD

The NASD is not the same as NASDAQ! Some people get confused because the names are similar. NASDAQ is a stock exchange system. NASD is the parent company of NASDAQ, but NASD does more than just run an exchange.

A common misconception among investors is that the NASD and the Nasdaq are the same thing. The Nasdaq is an exchange. The NASD, however, is responsible for the operation and regulation of the Nasdaq and the over-the-counter securities markets. It is the parent company of NASD Regulation, Inc. and The Nasdaq Stock Market, Inc.

NASD is a self-regulatory organization (SRO). This is a non-government organization which has regulatory authority granted by the government. Essentially every securities firm (over 5000 brokerages) doing business with the US public is a member of NASD. NASD regulates it own members through the adoption and enforcement of rules of conduct for fair, ethical and efficient practices.

To illustrate the functions of these organizations, consider how real life corporations relate to them. A corporation might trade on the Nasdaq stock market, which is overseen by the NASD, but it must file documents such as annual and quarterly reports (Forms 10-K and 10-Q) with the SEC.

The SEC is a government agency responsible for ensuring fairness for the individual investor while the NASD oversees most U.S.-based stockbrokers and brokerage firms.

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