What is a 'Self-Regulatory Organization - SRO'
A self-regulatory organization (SRO) is a non-governmental organization that has the power to create and enforce industry regulations and standards. The priority is to protect investors through the establishment of rules that promote ethics and equality. Some examples of SROs include stock exchanges, the Investment Dealers Association of Canada, and the National Association of Securities Dealers in the United States.
BREAKING DOWN 'Self-Regulatory Organization - SRO'As the term suggests, a self-regulatory organization (SRO) is responsible for regulating itself. Often, this is accomplished through internal mechanisms controlling the flow of business operations, or through an external agreement between like businesses.
Prime examples of an SRO include the Financial Industry Regulatory Authority (FINRA) and a variety of clearing houses. The purpose of these organizations is to govern from within while avoiding ties to a particular country's governance. This is particularly useful when activities are not solely located within one country.
Once the SRO has set regulations and provisions guiding the activity of those operating within it, those rules should be considered binding. Failure to operate within the regulations can have consequences, which are often spelled out when a firm considers associating with the SRO.
Powers Associated With FINRA
FINRA has the ability to license securities dealers. This extends to include the ability to audit dealers and associated firms, to ensure compliance with the standards currently in place. The purpose is to promote ethical practices and improve transparency within the sector.
Further, FINRA is responsible for overseeing arbitration between investors, brokers and other involved parties. This provides a standard upon which various disputes can be addressed, though it also limits actions that can be taken outside the system. In cases where arbitration is mandatory, this is typically referred to as binding arbitration.
An additional function taken on by the SRO involves the education of investors regarding proper business practices they should expect. It also provides information and input on any other areas of interest or concern, including questions regarding fraud or other unethical activities within the industry. It can also serve the function of helping investors understand the nature of how their investments work, as well as advising on how to mitigate any potential risks associated with the securities industry.
Although SROs are private organizations, they are still subject to government-imposed regulation to a certain degree. Any applicable laws or governmental regulations do apply, and are supplemented by the internal regulation put in place by the SRO.