The SEC and FINRA – Securities Industry Regulators

Regulatory Functions of the SEC and FINRA

Obviously, the securities arena has rules and guidelines to follow. Have you ever asked yourself who regulates brokerage firms and the securities industry? Who writes the laws dealing with securities? Who actually punishes violators of the rules and guidelines? Many of these types of questions can be answered by knowing the difference between the SEC and FINRA.

 The Securities and Exchange Commission (SEC)

The SEC stands for the Securities and Exchange Commission. The creation of the SEC was through the Securities Exchange Act of 1934 which was directly due to the great depression of the 1920s. To restore faith and confidence in investors in the markets, Congress held hearings to identify the problems to come up with solutions. This sparked Congress to pass the Securities Act of 1933, which is a set of laws governing securities.

The SEC was enacted to enforce the newly passed securities laws to promote stability in the markets, and most importantly, to protect investors.

The laws passed by Congress can be summed up by two common-sense notions:

• Companies publicly offering securities for investment dollars must tell the public the truth about their businesses, the securities they are selling, and the risks involved in investing.
• People who sell and trade securities – brokers, dealers, and exchange – must treat investors fairly and honestly, putting investors’ interests first.

The SEC is comprised of five commissioners with staggered five-year terms which are appointed by the President of the United States of America. One of the five is designated as the Chairman of the Commission, which is the agencies chief executive.

The SEC has five divisions and 23 offices, with the headquarters located in Washington, D.C. The Commission’s approximately 4,600 staff are located in Washington and in 11 regional offices throughout the country.

Responsibility of the commission range from interpreting and enforcing federal securities laws, issuing new rules and amending existing rules, overseeing the inspection of securities firms, brokers, investment advisors, and rating agencies, supervising private regulatory organization in the securities, accounting, and auditing fields, coordinating U.S. securities regulation with federal, state, and foreign authorities (among many others). To find out more about the SEC and its regulatory responsibilities visit www.sec.gov.

The Financial Industry Regulatory Authority (FINRA)

 FINRA, which stands for the Financial Industry Regulatory Authority, is the largest self-regulating organization (SRO) for all securities firms doing business in the United States. FINRA is a non-government organization. NASD (National Association of Securities Dealers, Inc.) (FINRA’s predecessor) was founded in 1939 in response to the 1938 Maloney Act amendments to the Securities Exchange Act of 1934, which allowed it to supervise the conduct of its members subject to the oversight of the SEC.

FINRA was formed by a consolidation of the NYSE (New York Stock Exchange) and NASD. The merger was approved by the SEC on July 26, 2007. FINRA has an estimated 3,400 employees and operates out of Washington D.C., and New York, NY, with 20 regional offices around the country.

All firms dealing in securities that are not regulated by another SRO, are required to be a member firm of FINRA. FINRA confirms every member is licensed and have passed exams to ensure everyone is compliant and up-to-date on the rules and regulations. FINRA licenses individuals and admits firms to the industry, writes rules to govern their behavior, examines them for regulatory compliance, and disciplines registered representatives and members firms that fail to comply with federal securities laws and FINRA’s rules and regulation. This organization releases regularly annual Regulatory and Examinations Priorities Letters to disseminate information.

How is each funded?

As you can assume, the SEC, being a government agency, is funded by the federal government, and receives a budget which is voted on and adjusted every fiscal year. For fiscal year 2016, 1.7 trillion dollars were requested.

Unlike the SEC, FINRA is funded by annual fees paid by the memberships and firms, as well as by fines and levies. The annual fee that each member pays includes a basic membership fee, an assessment based on gross income, a fee for each principle and registered representative, and charge for each branch. Essentially, FINRA is self-funded by its own efforts, whereas the SEC is funded by the tax payers. Since its inception, FINRA’s income has been on a rollercoaster track in the last 10 years. FINRA’s levied amounts range from 47.6 million in 2009, to 42.2 million in 2010, and to 71.9 million in 2011.

What are the Regulatory Functions of FINRA and the SEC?

Both FINRA and the SEC can implement regulatory functions. Sanctions include fines, suspension, restitution, and even barring individuals and firms from continuing operation in securities. More than one sanction can be issued at a time. An individual broker found to have committed fraud can be made to pay the customer who was wronged restitution, be suspended, and fined a monetary value. The clear distinction between the SEC and FINRA – is the SEC operates at the federal level, and utilizes the court system whereas FINRA does not. 

Investment Adviser v. Financial Advisor

Per the Investment Advisers Act of 1940, an Investment Advisor, or Adviser, is any person or group that makes investment recommendations or conducts securities analysis in return for a fee, whether through direct management of client assets or via written publications.

An investment advisor must be registered with the SEC if assets under management are over 110 million dollars, and with the state if less than 100 million dollars. If you notice there is a 10 million dollar gap, that is due to the fact, that once an IA reaches the 100 million dollar threshold, he or she can elect to register with the SEC, but once 110 million is reached they must register with the SEC.  To find out who is exempt from registration, visit SEC.gov.

A Financial Advisor, or Adviser, also receives compensation for issuing financial advice to customers. However, financial advisors can provide many different services like estate planning, income tax preparation, and investment management. Also, the term financial advisor is very nonspecific. Many other professions fall under the same term, for instance, stock brokers, financial planners, investment managers, tax preparers, and even insurance agents. With having multiple titles fall under the same name, you have to be on the lookout of what standards each are held to. FINRA has a background check available on all advisors and brokers which is called Broker Check. It is available to anyone, and is located on FINRA’s home page.

Fiduciary Duty v. Suitability

 The term fiduciary is a person who holds a legal or ethical relationship of trust with one or more parties. A Fiduciary duty is an obligation to act in the best interest of another party. This is a difficult area of securities because the investor is entrusting their broker to properly invest their hard earn funds. When this trust is violated or broker a determination needs to be made, of who is at fault. Only registered investment advisors (RIA) are held to a true fiduciary standard.

The suitability requirement is a FINRA rule (Rule 2111) which is based on a fundamental requirement that brokerage firms and their associated persons (sometimes referred to as brokers, financial advisors or financial consultations) dealt fairly with their customers. A Broker-dealer is only required to fulfill a suitability obligation, which is making a recommendation that is consistent with the best interest of the customer. This rule is more relaxed in the legal definition. It may be difficult to prove, but not impossible. Certain trade habits, buying and selling, and patterns can prove an advisor had or did not have his customer’s best interest in mind.

Free Consultation

 If you believe you have suffered financial losses due to your investments, the attorneys at The White Law Group may be able to help you recover your investment losses. Call 888-637-5510 for your no obligation consultation.

The White Law Group is a national securities arbitration, securities fraud, and investor protection law firm with offices in Chicago, Illinois, and Vero Beach, Florida.