Investing in private securities can potentially provide lucrative rewards, but the unwary can still be caught out by brokerage fraud when using unregulated broker-dealers.

Regulated broker-dealers ensure capital loss or gain is due purely to the success or failure of the market or the chosen issuer, while this cannot be guaranteed with an unregulated broker-dealer and exposes your investment to illegal risk.

Using a regulated broker-dealer won’t mean your investment is risk-free, but it does prevent any illegal activity or misleading information from your broker-dealer affecting your capital.

The US has two organizations recognized as regulatory bodies for US securities trading, the:

  • Securities and Exchange Commission (SEC) and…
  • Financial Industry Regulatory Authority (FINRA).

What is the SEC?

The SEC is an independent federal government regulatory agency introduced by the US congress in 1934 to protect and ensure fairness of security market trading and facilitate capital formation across the states. It was a government response to the stock market or Wall Street Crash of 1929, which precipitated the Great Depression globally.

The SEC promotes full public disclosure, protecting investors against fraudulent and manipulative market activity, and issuers must register their security with the SEC before selling shares to investors, while broker-dealers, advisory firms, and asset managers must also be registered.

If needed, the SEC can bring civil action against lawbreakers and work with the Justice Department to punish illegal activity.

What is the FINRA?

A not-for-profit, independent, nongovernmental, self-regulated organization, FINRA oversees and enforces broker-dealer regulation and licensing in the US.

FINRA can fine or ban broker-dealers who violate its rules: in 2019 alone it initiated 854 disciplinary actions, levying fines totalling $39.5 million, and ordering restitution to investors of $27.9 million while expelling six member firms and suspending 21.

FINRA also manages qualifying exams that issuers and broker-dealers must pass to sell or supervise security transactions, and takes disciplinary actions against registered individuals or firms that violate the industry’s rules. 

Why should you always invest through an SEC and FINRA member broker-dealer when investing in private securities?

Having the SEC and FINRA overseeing the securities market and its broker-dealers ensures accurate, transparent financial reporting and regulation, protecting investors from misrepresentation of financial information and enabling investors to make knowledgeable and reliable investment decisions, while protected from potentially misleading broker-dealers and brokerage fraud.

You may make unregulated investments in real estate, for example, but when investing in private company crowdfunding and private securities, do ensure the security and broker-dealer are both SEC and FINRA regulated.

Top tip: use the FINRA resource BrokerCheck to check whether a broker-dealer and private security are fully regulated before investing.

What if I’m investing through a non-US broker-dealer?

The UK’s financial services industry regulator is the Financial Conduct Authority (FCA) a public body falling under the UK treasury, responsible for British market functionality while ensuring open and fair markets by protecting investors. It has rulemaking, investigative and enforcement powers and is funded by fees levied from the firms it regulates.

EU (European Union) countries are regulated by the European Securities and Markets Authority (ESMA). ESMA is independent of the EU but provides safeguarding and stability to the EU’s financial systems through investor protection and stable markets.

ESMA assesses risks to investors and financial markets, has a single rulebook for all EU members to follow, and promotes supervisory convergence and supervising trade and securitization repositories.

Before you invest in a private security, ensure that the broker-dealer is regulated by the relevant regulatory body for your region, as this is crucial to safeguarding your investment.


Investors should recognise and accept the risks associated with investing.

Certain investments may require you to keep your holding for periods of many years with limited or no ability to resell unless there is a strongly regulated secondary market.

You may also have limited access to periodic reporting, see your holdings decrease and increase in value, or even lose your entire investment.

Investors should decide for themselves whether to make any investment, basing this on their own independent evaluation after consulting with financial, tax and investment advisors.

The Knowledge Hub does not constitute financial advice whatsoever, but rather provides basic general industry information.

Leave a Reply

Your email address will not be published. Required fields are marked *