How the Legal Framework for the U.S Securities Market Affects Crypto Assets and Trading

BACKGROUND

I. STATUTORY AND LEGAL FRAMEWORK

C. Registration of Exchanges, Broker-Dealers, and Clearing Agencies Is Essential to the Proper Functioning of the U.S. Securities Markets and to the Protection of Investors

57. In U.S. securities markets, the functions described above are typically carried out by separate legal entities that are independently registered and regulated by the SEC. Separation of these core functions aims to minimize conflicts between the interests of securities intermediaries and the investors they serve. Registration and concomitant disclosure obligations allow the SEC to oversee the business of intermediaries and their relationships with investors and to thereby protect investors from manipulation, fraud, and other abuses.

58. Investors in securities markets do not interact directly with exchanges or clearing agencies but instead are customers of broker-dealers that effect transactions on investors’ behalf. Only broker-dealers (or natural persons associated with a broker-dealer) may become members of a national securities exchange. In addition, broker-dealers that have customers must become members of the Financial Industry Regulatory Authority (“FINRA”), an SRO that imposes its own rules and oversight over broker-dealers, particularly as to protecting retail investors.

59. Registered national securities exchanges and clearing agencies are also SROs and therefore must submit all of their proposed rules and rules changes to the SEC for review.

60. As noted, the Exchange Act also subjects registered intermediaries to important record-keeping and inspection requirements. For example, Section 17 of the Exchange Act [15 U.S.C. § 78q] requires registered national securities exchanges, broker-dealers, and clearing agencies to make and keep records as the SEC prescribes by rule and subjects those records to reasonable periodic, special, or other examinations by representatives of the SEC.

61. These provisions are designed to ensure that intermediaries follow the rules that protect investors and promote the fair and efficient operation of the securities markets. These provisions also seek to ensure, among other things, that investors’ securities orders are handled fairly and transparently, that securities transactions result in settlement finality, and that investors’ assets are protected and can be recovered if necessary.