How does FINRA differ from the SEC?

By Investopedia Staff AAA
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. Where was the Dow Jones when Obama took office?

    Find out the value of the Dow Jones Industrial Average on the Jan. 20, 2009 inauguration of President Obama and how it has ...
  2. What is the difference between communism and socialism?

    Learn how some countries are incorporating socialist methods into capitalism.
  3. What exactly is being done when shares are bought and sold?

    Most stocks are traded on physical or virtual exchanges. The New York Stock Exchange (NYSE), for example, is a physical exchange ...
  4. Where does stimulus economics come from?

    Depending on which type of economist you talk to, stimulus economics originated from the ideas of either a book published ...
RELATED TERMS
  1. Appraised Equity Capital

    The excess of the market value of an asset over its book value. ...
  2. Asset Liquidation Agreement (ALA)

    A contract between the Federal Deposit Insurance Corporation ...
  3. Adverse Domination

    A legal doctrine that allows regulators to bring litigation against ...
  4. Affordable Market Value (AMV)

    The sale price of a multi-family residential housing unit sold ...
  5. Financial Action Task Force (FATF)

    An intergovernmental organization that designs and promotes policies ...
  6. patent attorney

    A lawyer with expertise in intellectual property law as it pertains ...
comments powered by Disqus
Related Articles
  1. Six Economic Reasons For Hong Kong Independence ...
    Economics

    Six Economic Reasons For Hong Kong Independence ...

  2. An Introduction to Government Loans
    Economics

    An Introduction to Government Loans

  3. How The IRS Works: Functions & Audits
    Taxes

    How The IRS Works: Functions & Audits

  4. The Government And Risk: A Love-Hate ...
    Insurance

    The Government And Risk: A Love-Hate ...

  5. Spotting A Market Bottom
    Bonds & Fixed Income

    Spotting A Market Bottom

Trading Center