Who Regulates the Securities Industry

The securities industry has layers of regulators. The exam wants you to know who sits where, and who answers to whom. This lesson gives you the two top layers: the SEC and the SROs.

The SEC: the federal regulator

The Securities and Exchange Commission (SEC) is the federal agency that enforces securities laws. Congress created it in 1934, after the 1929 crash, to restore trust in the markets.

The SEC's mission has three parts:

• Protect investors.
• Keep markets fair, orderly, and efficient.
• Help companies raise capital.

The SEC has real teeth. It can investigate firms, bring civil charges, fine wrongdoers, and bar people from the industry. It refers criminal cases to the Department of Justice, because the SEC itself handles civil enforcement, not criminal prosecution. That split shows up on the exam.

The SEC's authority covers the whole securities market: public companies, exchanges, broker-dealers, investment advisers, and the SROs below it. When a company wants to sell stock to the public, it registers that offering with the SEC. When a broker-dealer opens its doors, it registers with the SEC too.

The SEC never approves or endorses an investment. Registration means the company disclosed what the law requires. It does not mean the SEC thinks the stock is any good. The exam loves this trap.

SROs: the industry polices itself, under supervision

A self-regulatory organization (SRO) is an industry body that writes and enforces rules for its own members. SROs are not government agencies. Each one operates under SEC oversight, which means the SEC approves SRO rules before they take effect.

You need three SROs for the exam:

• FINRA (the Financial Industry Regulatory Authority) regulates broker-dealers and their registered people. FINRA writes conduct rules, runs qualification exams like the SIE, and disciplines firms that break the rules.
• The MSRB (Municipal Securities Rulemaking Board) writes the rules for the municipal securities market: the dealers and advisors who handle city and state bonds. The MSRB writes rules but does not enforce them. FINRA and other regulators handle enforcement of MSRB rules.
• CBOE (the Chicago Board Options Exchange) is an exchange that regulates trading on its own options market.

Think of it this way. The SEC is the government layer. The SROs are the industry layer, supervised by the government layer. A broker-dealer feels FINRA's rules day to day, and FINRA answers to the SEC.

How this gets tested

The exam usually asks you to place an organization on the org chart, not to recite a definition. Which one is a government agency? Only the SEC. Which one runs the SIE exam? FINRA. Which one writes municipal rules but leaves enforcement to others? The MSRB.

A sample of the logic: "Which regulator writes rules for municipal securities dealers?" The answer is the MSRB, even though FINRA enforces those rules. Writing and enforcing are different jobs, and the exam checks that you know whose job is whose.