Brokerage Regulations Overview. SEC and FINRA

Brokerage firms and the brokerage industry itself are heavily regulated in the U.S by the following organizations:

  • Federal Government
  • State Government
  • Self-Regulatory Organizations (SRO)

SECThe main regulator of the security industry is the Securities and Exchange Commission (SEC).  The SEC enforces the rules that all market participants must comply with. Among other responsibilities, the SEC is in charge of:

  • Regulation T – how brokerages should lend money to their customers and use customer securities and funds
  • Newly listed companies – how IPOs should be pushed into the public market
  • Reviewing fillings of investment companies

Brokers have an obligation to notify the SEC about changes in capital, organizational structure, and any observed frauds.

The SEC is the federal organization. In addition, every state in the U.S. has their own rules and regulations organizations. They oversee the operation of brokers who conduct business within the state.  Any brokerage firm which would like to have a business in the state must obtain a state license.

Such organizations should approve securities which are not listed in the national markets (NYSE, NASDAQ) before these securities will be able to be bought and sold in this state.

Every broker and broker-dealer must select a Self-Regulatory Organization (SRO).  Before 2007 the most known SROs were:

  • New York Stock Exchange(NYSE)
  • National Association of Securities Dealers (NASD)

FINRABrokers who conduct business at the NYSE have selected NYSE as their SRO; brokers who conduct business on the CBOE would choose the CBOE to be its SRO. And broker-dealers who are not a member of an exchange have  chosen the NASD. Recently,  in 2007, SEC approved the merger of the NYSE’s and NASD’s regulation department to form the FINRA (Financial Industry Regulatory Authority) which now is the largest Self-Regulatory Organization in the U.S.

The rules and regulations of SROs follow the federal rules; and these rules regard:

  • Days and hours of operations
  • Lot size
  • Membership requirements
  • Required documentation
  • Settlement cycles
  • Procedures and policies

FINRA also performs periodic audits of broker-dealers. These audits review firms’ internal procedures and application. The firms’ books and records are verified to be compliant with FINRA’s rules.

SEC and FINRA rules: