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.

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