Quick Answer
The Securities and Exchange Commission (SEC) sits on top as the federal regulator; self-regulatory organizations like FINRA and the MSRB write and enforce rules under its oversight; SIPC and FDIC protect customers in different ways; and brokers, dealers, advisers, and market makers each play a defined role. Know who has authority over what, and what each does not cover.
The whole unit on one sheet: who regulates, who operates, and the boundaries the exam loves to test.
The Regulatory Chain
- SEC (Securities and Exchange Commission): top federal regulator, a government agency, created by the Securities Exchange Act of 1934. Brings civil actions only; refers criminal cases to the Department of Justice.
- SROs (self-regulatory organizations): non-government bodies with authority delegated by the SEC. They write rules, submit them to the SEC for approval, then enforce.
- FINRA (Financial Industry Regulatory Authority): largest SRO; regulates broker-dealers and their registered representatives, runs the qualification exams (including the SIE), and can fine, suspend, bar, and expel.
- MSRB (Municipal Securities Rulemaking Board): writes rules for municipal securities dealers and municipal advisors but enforces nothing itself.
The One-Liners That Win Points
- SEC = government agency. FINRA and the MSRB = SROs, not government.
- SEC = civil only. Criminal cases go to the Department of Justice.
- MSRB writes rules; enforcement falls to FINRA (for broker-dealers) or the SEC (for municipal advisors). The MSRB never enforces.
- The Federal Reserve sets initial margin (Regulation T, 50%). FINRA sets maintenance margin.
- Broker = agent = commission. Dealer = principal = markup or markdown.
- Investment advisers owe a fiduciary duty. Broker-dealers are held to a suitability / best-interest standard.
Numbers to Lock In
| Item | Value |
|---|---|
| SEC commissioners | 5 (no more than 3 from one party) |
| Regulation T initial margin | 50% |
| SIPC total coverage | $500,000 per customer |
| SIPC cash sublimit | $250,000 per customer |
| FDIC coverage | $250,000 per depositor, per bank |
| Accredited investor net worth | over $1 million (excludes primary residence) |
| Accredited investor income | over $200,000 single / $300,000 joint (each of the last two years) |
SIPC vs. FDIC (the classic mix-up)
- SIPC (Securities Investor Protection Corporation) = failed broker-dealer, missing assets. Not market losses, bad advice, or fraud gains.
- FDIC (Federal Deposit Insurance Corporation) = failed bank, deposits only. Never securities.
Memory Aid: SCAM (the Securities Exchange Act of 1934)
- S: SEC creation (plus Federal Reserve margin authority and Regulation T)
- C: Credit regulation (margin)
- A: Antifraud
- M: Anti-Manipulation (wash trades, matched orders, painting the tape)
The Securities Act of 1933 = the one-time registration and prospectus for new offerings. The Securities Exchange Act of 1934 = the SEC, ongoing reporting, and trading rules.
Top Gotchas
- The SEC does not regulate insurance (state level), bank deposits (FDIC), or commodity futures (the Commodity Futures Trading Commission, CFTC).
- NASAA (the North American Securities Administrators Association) coordinates state regulators but does not itself regulate or enforce.
- An introducing broker does not hold customer funds; a clearing broker does.
- The OCC (Options Clearing Corporation) guarantees options contracts; the DTCC (Depository Trust & Clearing Corporation) clears equities, bonds, and mutual funds.
- FINRA was formed from the merger of the National Association of Securities Dealers and the New York Stock Exchange's regulatory arm; it was not created by the Securities Exchange Act of 1934 (that act created the SEC).
One-Breath Recap
SEC on top, SROs beneath it writing and enforcing, protection corporations backing customers, and a cast of brokers, dealers, advisers, and market makers operating inside the lines. Learn the boundaries and half the exam's regulatory questions answer themselves.
Need more than the recap? This is a condensed summary. If it is not enough, read the full Regulatory Entities and Market Participants unit for the complete lesson.