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Understanding the Key Differences Between FINRA vs. The SEC

It’s crucial for financial professionals to understand the differences between regulatory bodies like FINRA and the SEC, and how they regulate different areas of the financial industry. In this article, we’ll focus on the specific areas of compliance covered by FINRA vs. the SEC and the differences between them.

FINRA

FINRA oversees broker-dealers and their registered representatives as a self-regulatory organization. Its main goal is to ensure that broker-dealers operate transparently and fairly, and abide by FINRA’s regulations. To accomplish this, FINRA focuses on several areas, including:

  1. Setting ethical and fair sales practices standards for broker-dealers and their registered representatives when selling securities to customers.
  2. Requiring broker-dealers to maintain adequate levels of financial and operational compliance to meet their obligations to customers.
  3. Establishing standards for advertising and communications by broker-dealers and their registered representatives to prevent misleading or deceptive practices.

The SEC

The SEC (Securities and Exchange Commission) is a government agency that regulates the securities markets and protects investors. The SEC’s primary focus is on maintaining fair and orderly markets, and ensuring that companies provide investors with accurate and timely information about their operations and financial performance. This includes areas such as:

  1. Corporate disclosure – The SEC requires public companies to disclose certain information about their operations and financial performance to investors.
  2. Investment adviser compliance – The SEC regulates investment advisers and requires them to adhere to certain standards of conduct, such as providing suitable investment advice to clients.
  3. Market oversight – The SEC monitors the securities markets to ensure they are fair and orderly, and has the authority to take action against individuals or companies that engage in fraudulent or manipulative practices.

In terms of enforcement, FINRA has the authority to bring disciplinary actions against broker-dealers and their registered representatives, and to fine or suspend them for violating FINRA rules and regulations. The SEC, on the other hand, has broader enforcement powers and can bring both civil and criminal charges against companies and individuals that violate securities laws.

Regulatory Bodies through Time

Additionally, the CFTC and the NFA play a prominent role ins the financial regulatory environment. Here is a review of their historic mandate and bodies.

SEC (Securities and Exchange Commission): The SEC is a federal agency that regulates the securities markets and protects investors. Its primary mission is to maintain fair and orderly markets and to ensure that companies provide investors with accurate and timely information about their operations and financial performance. The SEC was established in 1934 by the Securities Exchange Act and has a five-member commission appointed by the President and confirmed by the Senate. The SEC has broad enforcement powers, and it can bring both civil and criminal charges against companies and individuals that violate securities laws.

CFTC (Commodity Futures Trading Commission): The CFTC is an independent federal agency that regulates commodity futures and options markets in the United States. Its mission is to protect market participants and the public from fraud, manipulation, and abusive practices related to commodity futures and options trading. The CFTC was established in 1974 by the Commodity Futures Trading Commission Act and has five commissioners appointed by the President and confirmed by the Senate. The CFTC has enforcement powers, and it can bring both civil and criminal charges against companies and individuals that violate commodity trading laws.

FINRA (Financial Industry Regulatory Authority): FINRA is a non-governmental, self-regulatory organization that oversees broker-dealers and their registered representatives. It was created in 2007 when the National Association of Securities Dealers (NASD) merged with the regulatory arm of the New York Stock Exchange (NYSE). FINRA is responsible for ensuring that broker-dealers operate in a fair and transparent manner and comply with FINRA rules and regulations. FINRA is overseen by a Board of Governors, and its funding comes primarily from fees paid by its members. FINRA has enforcement powers, and it can bring disciplinary actions against broker-dealers and their registered representatives and fine or suspend them for violating FINRA rules and regulations.

NFA (National Futures Association): The NFA is a self-regulatory organization that oversees the derivatives industry in the United States, including futures and swaps markets. It was established in 1982 under the Commodity Futures Trading Commission Act as a non-profit organization. The NFA is responsible for setting and enforcing industry standards and providing educational resources to market participants. The NFA is overseen by a Board of Directors, and its funding comes primarily from fees paid by its members. The NFA has enforcement powers, and it can bring disciplinary actions against individuals and firms that violate NFA rules and regulations.

Operating in Compliance with the SEC and FINRA

Understanding the specific areas of compliance covered by FINRA and the SEC is essential for anyone working in the financial industry. By adhering to their respective rules and regulations, you can help ensure that you operate in a fair and transparent manner, and avoid potential legal and reputational risks.

In summary, the main difference between staying compliant in business communication between the FTC and FINRA is that the FTC primarily focuses on consumer protection and preventing deceptive advertising practices, while FINRA concentrates on ensuring fair and transparent practices within the securities industry. While both organizations require businesses to comply with their respective regulations, the specific guidelines and standards they set can vary. Therefore, it’s essential for businesses to understand the requirements of each organization to ensure their communications are compliant.