When it comes to regulating the financial system of the United States, two prominent entities often come into the spotlight: FINRA and the SEC. While the former is responsible for overseeing the activities of brokerage firms and registered brokers, the latter has broader authority and scope to protect investors by regulating securities markets. When working with a financial advisor, be sure their firm is registered with either the SEC or a state regulatory authority.
What Is FINRA?
The Financial Industry Regulatory Authority (FINRA) is a self-regulatory organization (SRO) established in 2007 through the merger of the National Association of Securities Dealers (NASD) and the New York Stock Exchange’s regulatory division. Unlike the SEC, FINRA is not a government agency. Instead, it’s a nonprofit organization authorized by Congress to oversee and regulate the conduct of broker-dealers and their registered representatives.
Because it’s an SRO, the majority of FINRA’s funding comes from the securities firms it regulates. As of 2022, FINRA was responsible for the regulation of 3,380 firms, more than 150,000 branch offices and approximately 621,000 registered securities representatives.
What Does FINRA Do?
FINRA is responsible for registering and licensing brokerage firms and professionals. This process involves rigorous qualification examinations to ensure that individuals working in the securities industry possess the necessary knowledge and competence.
The organization also establishes and enforces rules and regulations governing the conduct of its member firms and their associated individuals. These rules cover a wide range of activities – from sales practices to trading operations – and are designed to maintain market integrity.
FINRA also provides a forum for investors and brokerage firms to resolve disputes through arbitration and mediation, offering a cost-effective and efficient alternative to lengthy court proceedings.
What Is the SEC?
The Securities and Exchange Commission (SEC) is a U.S. government oversight agency tasked with regulating the securities markets and protecting investors. It diligently works to enforce laws and promote marketplace transparency, shielding investors from fraudulent activities, as demonstrated in high-profile cases like the Bernie Madoff investment scandal, among others.
Established in 1934 in response to rampant stock market abuses that had contributed to the devastating crash of 1929. Its primary mission is to protect investors, maintain fair, efficient, and competitive markets, and facilitate capital formation. To accomplish these objectives, the SEC enforces a comprehensive set of rules and regulations governing the securities industry.
The SEC is headed by a group of five commissioners, each appointed by the President of the United States and confirmed by the Senate. These commissioners serve staggered five-year terms, with one commissioner’s term expiring every year. To ensure a degree of bipartisan representation, no more than three commissioners can belong to the same political party.
The president also appoints one of the commissioners as chair of the SEC. This individual is responsible for providing leadership and direction to the agency. The chair’s role is pivotal, as they set the agenda, priorities, and overall tone of the SEC.
What Does the SEC Do?
The SEC’s regulatory scope extends well beyond that of FINRA, overseeing public companies, investment companies, investment advisors, brokers-dealers and securities exchanges. Therefore, it maintains comprehensive supervision over the U.S. financial markets.
One of the SEC’s critical functions is to enforce securities laws. It investigates and takes action against individuals and entities involved in fraudulent or deceptive practices within the financial markets. These actions can range from fines and penalties to restraining orders and criminal prosecutions.
To foster transparency, the SEC mandates that publicly traded companies disclose essential financial information and other material facts to the public. These disclosures are typically made in periodic reports, such as quarterly and annual filings, and are easily accessible to investors and analysts.
A significant part of the SEC’s mission is to protect investors from fraudulent activities and scams. Through its investor education programs and resources, the SEC empowers individuals to make informed investment decisions and recognize potential risks.
The SEC also oversees the operation and integrity of securities markets. It ensures that market participants adhere to rules that promote fairness and efficiency, preventing manipulative and abusive practices.
Key Differences Between FINRA and the SEC
Understanding the differences between FINRA and the SEC requires delving into their focus areas, regulatory authority, structure and more.
Scope, Authority and Focus
FINRA primarily regulates brokerage firms and professionals, while the SEC has a broader mandate, overseeing the entire securities industry, including public companies and investment advisors.
FINRA operates as a self-regulatory organization, whereas the SEC is a federal agency with greater regulatory authority and the power to create and enforce securities laws.
While the SEC focuses on market integrity, investor protection and policy development, FINRA concentrates on ensuring the conduct and ethical standards of its member firms and associated individuals.
What Are the Different Divisions of the SEC?
Because the SEC has a wider scope than FINRA, the agency consists of six divisions that all play specific roles in carrying out its mission. The divisions and the roles are as follows:
Division of Corporate Finance: This division primarily oversees the disclosure of important information to investors by publicly traded companies.
Division of Enforcement: Charged with investigating potential violations of securities laws, this division takes legal action when necessary.
Division of Investment Management: Responsible for regulating investment companies and advisors, this division ensures that investors are provided with accurate and relevant information about investment products.
Division of Trading and Markets: This division regulates securities exchanges, broker-dealers and other market participants to maintain market integrity and protect investors.
Division of Economic and Risk Analysis (DERA): DERA provides economic analysis and risk assessment to inform SEC policymaking and enforcement activities. They help the SEC understand the potential economic impacts of regulatory changes.
Division of Examinations: Formerly known as the Office of Compliance Inspections and Examinations (OCIE), this division conducts examinations and inspections of registered entities to ensure they comply with federal securities laws.
Bottom Line
In conclusion, understanding the distinct roles and scopes of FINRA and the SEC is the gateway to navigating the financial industry more adeptly. While both play critical roles in maintaining financial markets’ integrity and protecting investors, they are distinct entities with different mandates.
Tips for Investors
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