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The SEC vs. FINRA: A Guide for Investors and Financial Professionals


The SEC vs. FINRA: What You Need to Know

If you are an investor or a financial professional, you may have heard of the SEC and FINRA. These are two of the most important regulatory bodies in the U.S. financial system, but they have very different roles and functions. In this post, we will explain what the SEC and FINRA are, what they do, and how they differ.

What is the SEC?

The SEC stands for the Securities and Exchange Commission. It is a federal government agency that was created in 1934, after the stock market crash of 1929 and the Great Depression. The SEC’s main mission is to protect investors and maintain the integrity of the securities market. The SEC oversees all aspects of the securities industry, including:

  • Registering and regulating securities issuers, such as public companies and mutual funds
  • Enforcing securities laws and rules, such as the Securities Act of 1933 and the Securities Exchange Act of 1934
  • Investigating and prosecuting securities fraud and violations, such as insider trading and market manipulation
  • Reviewing and approving corporate disclosures, such as financial statements and prospectuses
  • Educating and informing investors and the public about securities matters, such as investor alerts and bulletins

The SEC has broad authority and power to regulate the securities market and ensure its fairness and efficiency. The SEC can issue rules and regulations, conduct inspections and examinations, bring civil and administrative actions, and work with the Justice Department on criminal cases. The SEC also oversees other regulatory organizations, such as FINRA and the Public Company Accounting Oversight Board (PCAOB).

What is FINRA?

FINRA stands for the Financial Industry Regulatory Authority. It is a not-for-profit entity that is authorized by Congress to regulate broker-dealers in the U.S. It was established in 2007, through the merger of the National Association of Securities Dealers (NASD) and the regulatory operations of the New York Stock Exchange. FINRA’s main mission is to protect investors and promote market integrity. FINRA oversees all aspects of the broker-dealer industry, including:

  • Licensing and registering broker-dealers and their agents, such as the Series 7 exam
  • Writing and enforcing rules and standards for broker-dealer conduct, such as the suitability rule and the best execution rule
  • Examining and auditing broker-dealers for compliance and risk management, such as the annual audit and the net capital rule
  • Investigating and disciplining broker-dealer violations and misconduct, such as unauthorized trading and churning
  • Arbitrating and mediating disputes between investors and broker-dealers, such as customer complaints and claims

FINRA is a self-regulatory organization (SRO), which means that it is a membership-based organization that creates and enforces rules for its members based on federal laws. FINRA operates under the direction and oversight of the SEC, which approves its rules and reviews its actions. FINRA also cooperates with other regulators, such as the SEC, state securities regulators, and foreign regulators.

How do the SEC and FINRA differ?

The SEC and FINRA are both regulatory bodies that protect investors and ensure the integrity of the securities market, but they have different scopes and purposes. The main differences between the SEC and FINRA are:

  • The SEC is a federal government agency, while FINRA is a not-for-profit entity.
  • The SEC regulates the entire securities industry, while FINRA regulates only broker-dealers and their agents.
  • The SEC has broad regulatory and enforcement powers over securities markets, while FINRA has specific rules and standards for broker-dealer conduct.
  • The SEC can bring civil and criminal actions against securities violators, while FINRA can only bring disciplinary actions against its members.
  • The SEC oversees FINRA and acts as the first level of appeal for actions brought by FINRA, while FINRA operates independently from the SEC.

Why are the SEC and FINRA important?

The SEC and FINRA are important because they help ensure that the securities market is fair, transparent, and efficient for investors and the public. By regulating securities issuers, broker-dealers, and other market participants, the SEC and FINRA aim to prevent fraud, abuse, and manipulation, and to promote compliance, disclosure, and accountability. By enforcing securities laws and rules, the SEC and FINRA seek to deter and punish securities violations and misconduct, and to provide remedies and relief for harmed investors. By educating and informing investors and the public, the SEC and FINRA strive to increase investor confidence and awareness, and to foster a culture of investor protection.

Conclusion

The SEC and FINRA are two of the most important regulatory bodies in the U.S. financial system, but they have very different roles and functions. The SEC is a federal government agency that regulates the entire securities industry, while FINRA is a not-for-profit entity that regulates only broker-dealers and their agents. The SEC has broad regulatory and enforcement powers over securities markets, while FINRA has specific rules and standards for broker-dealer conduct. The SEC oversees FINRA and acts as the first level of appeal for actions brought by FINRA, while FINRA operates independently from the SEC. Both the SEC and FINRA are essential for protecting investors and ensuring the integrity of the securities market.





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