Self-Regulatory Organizations (SROs)
Now that you understand the Securities and Exchange Commission's (SEC's) role as the top federal regulator, the next layer of regulation involves organizations the SEC has authorized to create and enforce their own rules.
What Is an SRO?
- A self-regulatory organization (SRO) is a non-governmental organization that creates and enforces rules for its members
- SROs operate under authority delegated by the SEC; the SEC has ultimate oversight
- SROs must submit proposed rule changes to the SEC for approval before they take effect
Exam Tip: Gotchas
SROs are not government agencies; they are non-governmental organizations with delegated authority. Follow the chain: SEC delegates authority to SROs, SROs write rules and submit them to the SEC for approval, then FINRA enforces its own rules plus MSRB rules for broker-dealers.
The Major SROs
| SRO | Full Name | What It Regulates |
|---|---|---|
| FINRA | Financial Industry Regulatory Authority | Broker-dealers and registered representatives |
| MSRB | Municipal Securities Rulemaking Board | Municipal securities dealers and municipal advisors |
| CBOE | Chicago Board Options Exchange | Options trading on its exchange |
| NYSE | New York Stock Exchange | Listed securities and member firms |
FINRA - The Largest SRO
- FINRA is the largest SRO for broker-dealers in the United States
- Created in 2007 from the merger of the NASD (National Association of Securities Dealers) and the NYSE's regulatory functions
- FINRA's key functions:
- Administers qualification exams (including the SIE)
- Licenses individuals and admits firms to the industry
- Writes rules governing broker-dealer conduct
- Examines firms for regulatory compliance
- Enforces its own rules and federal securities laws (for broker-dealers)
- FINRA's enforcement powers (it can):
- Fine members and associated persons
- Suspend them from the industry
- Bar them permanently
- Expel member firms
Exam Tip: Gotchas
FINRA was created in 2007 (not 1934 or 1974). Questions may try to associate FINRA with the Securities Exchange Act of 1934. That act created the SEC, not FINRA.
MSRB - The Rulemaker Without Enforcement
- The MSRB writes rules for municipal securities dealers and municipal advisors
- The MSRB does not enforce its own rules. This is a critical distinction
Who enforces MSRB rules?
| Entity Type | Enforced By |
|---|---|
| Broker-dealers | FINRA |
| Municipal advisors | SEC |
| Banks | Federal banking regulators |
Key MSRB rules to know:
- Rule G-11: Primary offering practices
- Rule G-32: Disclosures in connection with primary offerings
- Rule G-34: CUSIP numbers and new issue requirements
Exam Tip: Gotchas
The MSRB is a rulemaking body only. It has no enforcement authority. If a question asks who enforces MSRB rules for broker-dealers, the answer is FINRA. If it asks who enforces MSRB rules for municipal advisors, the answer is the SEC. The MSRB itself never enforces.