Quick Answer
The Securities and Exchange Commission (SEC) sits on top as the federal regulator; self-regulatory organizations like FINRA and the MSRB write rules under its oversight, but enforcement depends on the regulator; 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 making retail recommendations must act in the customer's best interest under Regulation Best Interest (Reg BI).
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? Read the full Regulatory Entities and Market Participants unit.