FINRA vs. the SEC: An Overview
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. financial system, but they have very different scopes and purposes.
- The Financial Industry Regulatory Authority (FINRA) handles the licensing and regulation of broker-dealers.
- FINRA is a not-for-profit entity that is not part of the government.
- The Securities and Exchange Commission (SEC) is a government organization that is meant to protect investors and ensure the integrity of the securities market.
- The SEC oversees FINRA and acts as the first level of appeal for actions brought by FINRA.
An SRO is a membership-based organization that creates and enforces rules for members based on federal laws. FINRA is on the front line in licensing and regulating broker-dealers. FINRA handles the testing that securities professionals have to pass to sell securities, such as Series 7. The SEC oversees FINRA.
FINRA lays out the rules that govern brokers, overseeing some 3,435 securities firms and 617,549 registered representatives. FINRA, meanwhile, employs more than 3,500 employees across the U.S.
The primary mission of the SEC is to protect investors and maintain the integrity of the securities market—both formal exchanges and over-the-counter (OTC). The SEC rose out of the ashes of the great stock market crash of 1929.
After the crash and the ensuing Great Depression, public confidence in the stock market fell to an all-time low. As a result, Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934. These acts were designed to restore investor confidence through two main principles:
- Companies offering securities to the public must be truthful and transparent about their businesses and the risks involved in investing.
- 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. The SEC includes 11 regional offices and six divisions.
The SEC can bring civil actions against lawbreakers and can work with the Justice Department on criminal cases. Civil actions by the SEC include civil money penalties and injunctions. The SEC can also pursue court orders that suspend individuals from being officers or directors and bring administrative proceedings, such as cease-and-desist orders and imposing bars or suspensions of employment.
The SEC has a wider scope as it oversees all aspects of the financial and business environment as opposed to the limited scope that FINRA has. The SEC oversees corporate finance, economic and risk analysis, enforcement, examinations, investment management, and trading and markets. The SEC is responsible for ensuring fairness for the individual investor.
FINRA is responsible for overseeing virtually all U.S. stockbrokers and brokerage firms and providing avenues and legal certifications for those individuals to appropriately operate in their specific marketplaces.
In addition, the bulk of corporate filings that companies are required to file are directly with the SEC, such as 10-K and 10-Q filings as well as a multitude of other filings related to corporate actions.
Furthermore, the power of FINRA is extended by the SEC. Congress created the SEC and the SEC's jurisdiction includes FINRA. The SEC also acts as the first level of appeal for actions brought by FINRA.
Are FINRA and the SEC the Same Organization?
No, FINRA and the SEC are not the same organization. The SEC was created in the 1930s during the Great Depression as a way to regulate the financial markets and protect investors. It has a large scope that includes all financial and business activity in the U.S. FINRA, on the other hand, is a non-governmental organization that is overseen by the SEC and focuses on regulating brokers.
What Does the SEC Do?
The primary objective of the SEC is to protect investors in the U.S. by regulating the securities market. It has a wide scope and requires registration and disclosing of certain financial information. It enforces securities law and ensures that all information to investors is above board and that all players in the financial markets act accordingly to the law.
What Is FINRA?
FINRA stands for "Financial Industry Regulatory Authority" and is a not-for-profit organization overseen by the SEC that seeks to protect investors by primarily overseeing all brokers in the securities marketplace. It lays out specific laws and requirements and provides certificates for individuals to be able to operate in the securities market.