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 its own regulation. 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 necessarily derive from a grant of authority from the government. Often, this is accomplished 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 (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 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 responsible for overseeing arbitration between investors, brokers and other involved parties. This provides a standard upon which various disputes can be addressed although 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.

Investor Education

An additional function undertaken by the SRO is education 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 to understand how their investments work and 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 do apply and are supplemented by the internal regulation put in place by the SRO.

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