What is a Compliance Department?

Compliance departments are entities within a brokerage or stock exchange that are concerned with making sure all transactions are conducted within applicable regulations. Also known as a compliance unit, the compliance department will take into account both governmental standards that apply as well as any regulations that are created and followed within the specific brokerage or stock exchange. In general, the compliance department ensures that all transactions are legal, ethical, and are in the best interests of the clients involved.

When it comes to brokerages and stock exchanges that are based in the United States, the compliance department will be primarily focused on making sure all transactions are in line with regulations laid out by the Securities and Exchange Commission. It is the task of the SEC to draft legislation that governs all investment activity within the United States. The compliance department of each brokerage will make sure that there is no aspect of any transaction conducted through the firm that is illegal in any manner. At the same time, the brokerage may have drafted certain ethical regulations above and beyond the basic SEC requirements. If trading activity is uncovered that breaches those codified ethics, then a client may be rejected or a broker who is in violation may be severed from the firm.

The compliance department functions with the purpose of ensuring that fair play takes place at all times. Along with the orderly and legal processing of orders from clients, the compliance department will also analyze transactions that are made on behalf of the investment portfolio of the firm. This process can help to ensure there are no questions about the manner in which the firm chooses to make investments, and helps to provide perimeters for the actions of the brokers who execute those orders.

When it comes to stock exchanges, the presence of a compliance department is also helpful. By evaluating various incidences of trading, it is possible to ensure that all activity is being conducted in a manner that is acceptable and within the guidelines provided by the local jurisdiction. This can help to minimize the incidence of such unfair practices as insider trading, as well as make it possible to identify investors who are employing trading practices that are questionable. In this sense, the compliance department within a given stock exchange protects all the participating investors from incurring a loss due to illegal and unethical practices on the part of a few.