A:

With all the financial organizations out there, knowing what they all do can be as complicated as knowing where to invest. The Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) - formerly, the National Association of Securities Dealers (NASD) - are two of the most important regulatory bodies in the U.S. market, but have very different scopes and purposes.

The primary mission of the SEC is to protect investors and maintain the integrity of the securities markets (exchanges and over-the-counter markets). The SEC rose out of the ashes of the great stock market crash in October of 1929. After the crash and the ensuing depression, confidence in the markets fell to an all-time low. Congress held hearings to identify problems in the market and concluded that faith in the system needed to be restored. As such, the Securities Act of 1933 and the Securities Exchange Act of 1934 were passed. These acts were designed to restore investor confidence through two main principles:

  1. Companies offering securities to the public must be truthful about their businesses and the risks involved in investing.
  2. Companies that sell and trade securities (brokers, dealers and exchanges) must treat all investors fairly and honestly.

When these securities laws were passed, the SEC was established to enforce them. Their focus was, and remains, to promote stability in the markets and, most importantly, to protect investors.

FINRA is the largest self-regulatory organization (SRO) in the securities industry in the United States. An SRO is a membership-based organization that creates and enforces rules for members based on the federal securities laws. SROs, which are overseen by the SEC, are the front line in regulating broker-dealers.

To summarize, the SEC is responsible for ensuring fairness for the individual investor and Finra is responsible for overseeing virtually all U.S. stockbrokers and brokerage firms. In the grand scheme of things, FINRA is overseen by the SEC.

For further reading, see The Securities And Exchange Commission Defined.

RELATED FAQS
  1. How do I know if I am buying unregistered securities or stocks?

    All securities, including stocks, bonds and notes, must be registered with the Securities and Exchange Commission (SEC) before ... Read Answer >>
  2. What are the SEC (Securities And Exchange Commission) rules about OTC (over-the-counter) ...

    Find out how the Securities and Exchange Commission and the Financial Industry Regulatory Authority regulate trades on the ... Read Answer >>
  3. Do financial advisors need to be approved by FINRA?

    Learn about whether a financial advisor may be required to be approved by FINRA, and what exams a financial advisor needs ... Read Answer >>
  4. I want to start my own brokerage company, how do I become a member of FINRA?

    Before you read on, note that the Financial Industry Regulatory Authority (FINRA), (previously the National Association of ... Read Answer >>
  5. What financial regulation exist to control the secondary market?

    Examine a brief characterization of financial regulation in the secondary market, including self-regulatory organizations ... Read Answer >>
  6. Is it possible to take the Series 6 exam without being sponsored?

    Unfortunately, the answer to this question is "No." The Financial Industry Regulatory Authority or FINRA (previously the ... Read Answer >>
Related Articles
  1. Insights

    Understanding the SEC

    The SEC's triple mandate of investor protection, maintenance of orderly markets and facilitation of capital formation makes it a vital player in capital markets.
  2. Financial Advisor

    SEC's CARDS Plan Creates Controversy for Brokers

    The securities industry isn't happy with the hand it may be dealt with the SEC's proposed CARDS rules.
  3. Personal Finance

    Policing The Securities Market: An Overview Of The SEC

    Find out how this regulatory body protects the rights of investors.
  4. Insights

    The SEC: A Brief History Of Regulation

    The SEC has continued to make the market a safer place and to learn from and adapt to new scandals and crises.
  5. Financial Advisor

    How To Get A Job At The SEC

    Want to make a good living taking on those renegade trading rascals on Wall Street? Here are some tips to help you get in the door at the SEC.
  6. Financial Advisor

    Steps to Starting Up an Independent Broker Dealer

    Launching your own broker-dealer is a lot of work, but the potential payoff is great, both personally and financially.
  7. Financial Advisor

    A Review of SEC Enforcement Cases in 2016

    The SEC set a new record in 2016 for the number of enforcement actions it brought.
  8. Financial Advisor

    Why Financial Advisor Background Checks Are Vital

    An alliance of public interest groups is pressuring FINRA to broaden its BrokerCheck tool.
  9. Trading

    Get To Know These Crucial US Options Market Regulations

    How are options regulated in the U.S and which organizations are involved in options market regulations?
RELATED TERMS
  1. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association ...
  2. Securities And Exchange Commission - SEC

    A government commission created by Congress to regulate the securities ...
  3. National Association Of Securities Dealers - NASD

    The NASD was a self-regulatory organization of the securities ...
  4. SEC Form 10

    A filing with the Securities and Exchange Commission (SEC), also ...
  5. SEC Form PILOT

    A form that is filed with the SEC by self-regulatory organizations ...
  6. Dealer

    A person or firm in the business of buying and selling securities ...
Hot Definitions
  1. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  2. Down Round

    A round of financing where investors purchase stock from a company at a lower valuation than the valuation placed upon the ...
  3. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  4. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment is made with the expectation of earning a return on it. This ...
  5. Treynor Ratio

    A ratio developed by Jack Treynor that measures returns earned in excess of that which could have been earned on a riskless ...
  6. Buyback

    The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies ...
Trading Center