What is a 'Self-Regulatory Organization - SRO'?

A self-regulatory organization is a non-governmental organization that has the power to create and enforce industry regulations and standards. The priority is to protect investors by establishing 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, an SRO regulates itself. It also has some regulatory influence over an industry or profession, and that influence or authority could replace government regulation or be an addition to government regulation. The ability of an SRO to exercise regulatory authority does not derive from a grant of authority from the government. SROs often accomplish this through internal mechanisms that control the flow of business operations or through an external agreement between like businesses.

Prime examples of an SRO include the Financial Industry Regulatory Authority and a variety of clearing houses. These organizations' purpose is to govern from within while avoiding ties to a country's governance. This is useful when its activities are not solely within one country.

Once the SRO has set regulations and provisions guiding the activity of those operating within it, those rules are binding. Failure to operate within the regulations can have consequences, and a firm has those rules spelled out when it considers associating with the SRO.

Powers Associated With FINRA

FINRA can license securities dealers. This includes the ability to audit dealers and associated firms, and ensure compliance with the standards currently in place. The purpose is to promote ethical practices and improve transparency within the sector. FINRA is also oversees arbitration between investors, brokers and other involved parties. This provides a standard to address various disputes although it also limits actions a firm can take outside the system. When arbitration is mandatory, this is typically referred to as binding arbitration.

Investor Education

An additional function undertaken by the SRO is educating investors on appropriate business practices. The SRO provides information and input on any other areas of interest or concern including fraud or other unethical activities within the industry. The SRO can also help investors understand how their investments work and advise on methods to mitigate any potential risks associated with the securities industry.

Governmental Regulation

Although SROs are private organizations, they are subject to government-imposed regulation to a certain degree. Any applicable laws or governmental regulations apply, and SRO-placed regulations are supplemental.

RELATED TERMS
  1. SEC Form PILOT

    SEC Form PILOT is a filing with the SEC by self-regulatory organizations ...
  2. Financial Industry Regulatory Authority ...

    The Financial Industry Regulatory Authority (FINRA) is a regulatory ...
  3. SEC Form 19b-4

    SEC Form 19b-4 is a form that is used to inform the SEC of a ...
  4. Associated Person

    An associated person is any owner, partner, officer, director, ...
  5. Association Of Futures Brokers ...

    Association Of Futures Brokers And Dealers was a London-based ...
  6. Regulated Market

    A regulated market is a market over which government bodies or, ...
Related Articles
  1. Financial Advisor

    Investigating The Securities Police

    Learn about the history of FINRA and how this organization protects investors.
  2. Insights

    Financial Regulators: Who They Are and What They Do

    Find out how these financial regulators govern the financial markets.
  3. Insights

    If You Win a Broker Arbitration, But Can't Collect

    Here's what to do next if your broker stiffs you when you win an arbitration.
  4. Investing

    What Is a Broker-Dealer and Why Should You Care?

    Before deciding who to use for help with your investing, learn what brokers, dealers, and broker-dealers are and what services they provide.
  5. Personal Finance

    Policing The Securities Market: An Overview Of The SEC

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

    Fintech in the Trump Era: Regulatory Changes to Expect

    Will Trump’s administration try to repeal Dodd-Frank, or simply change financial regulations?
  7. Trading

    Navigating U.S. Regulations For Forex Brokers

    Forex is, understandably, tightly regulated. We navigate the forex regulations in the United States and other countries.
  8. Insights

    Understanding a Free Market Economy

    Why would we want a free market economy?
  9. Insights

    Financial Regulations: Glass-Steagall to Dodd-Frank

    Here are some of the most important financial regulations that have been established.
RELATED FAQS
  1. How are asset management firms regulated?

    Find out how the asset management industry is regulated and how those regulations fit within the broader scope of financial ... Read Answer >>
  2. How does regulation impact the electronics sector?

    Learn more about production regulation in the electronics industry and how these regulations may contribute to lesser productivity ... Read Answer >>
  3. What Major is Required to take the Series 7 Examination?

    Find out what educational requirements are needed for the Series 7 exam. Learn about the new Securities Industry Essentials ... Read Answer >>
  4. Are There Requirements After the Series 7 CE Exam?

    According to the Securities Industry/Regulatory Council on Continuing Education (CEC), there are two part to the CE requirement ... Read Answer >>
Trading Center