Q:

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.

A:

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