FINRA vs. the SEC: An Overview
- 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 3,700 brokerage firms and almost 630,000 registered securities representatives. FINRA, meanwhile, employs 3,600 employees across 16 offices.
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 24 offices and five 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 is responsible for ensuring fairness for the individual investor, and FINRA is responsible for overseeing virtually all U.S. stockbrokers and brokerage firms. The SEC oversees FINRA and acts as the first level of appeal for actions brought by FINRA.