What Is a Self-Regulatory Organization (SRO)?
A self-regulatory organization (SRO) is an entity, often non-governmental, that has the authority to create and enforce its own industry and professional regulations and standards. In the realm of finance, SROs, such as stock exchanges, prioritize investor protection by establishing rules, regulations, and professional standards that promote ethics, equality, and professionalism.
Key Takeaways
- An SRO has the power to set industry standards and self-regulate its own members.
- Effective SROs provide enforceable standards for their members to follow.
- Despite their private ownership, government can influence broader policies of SROs.
- Collaborative efforts among industry members can give rise to new SROs, contributing to competitiveness and safety in the absence of stringent governmental oversight.
- Examples of financial SROs include FINRA and the New York Stock Exchange (NYSE).
Understanding Self-Regulatory Organizations (SROs)
SROs, while private, do still face a level of government oversight. However, government delegates certain aspects of industry regulation to these organizations. SROs act as watchdogs against fraud or unethical practices in their respective fields. Their regulatory authority comes from internal mechanisms or external agreements among businesses, ensuring governance from within without solely relying on government influence.
Note
Governmental laws and regulations take precedence over those set by SROs, making SRO rules supplementary.
Authority of SROs
Regulations and standards set by an SRO are binding for their members. Non-compliance can result in penalties. SROs may also impose professional criteria, including specific educational backgrounds or ethical standards for membership. They play a crucial role in educating investors about business practices, investment risks, and methods to protect against fraud and unethical activities.
Examples of SROs
Major SROs you might be familiar with include:
- The New York Stock Exchange (NYSE)
- The Financial Planning Association (FPA)
- Chicago Board of Trade (CBOT)
- American Council of Life Insurers (ACLI)
- Financial Industry Regulatory Authority (FINRA)
- Fixed Income Clearing Corporation (FICC)
- Options Clearing Corporation (OCC)
- American Institute of Certified Public Accounts (AICPA)
Country-specific SROs include Canada’s Investment Industry Regulatory Organization of Canada (IIROC) and India’s Association of Mutual Funds in India (AMFI). Similarly, industries like the American Bar Association and the Institute of Nuclear Power Operations (INPO) have their own SROs.
FINRA
The Financial Industry Regulatory Authority (FINRA) licenses securities dealers, audits them, and ensures compliance with industry standards, thereby promoting ethical practice and transparency. It also mediates disputes between parties, enforcing a standardized approach to conflict resolution.
What Does an SRO Mean in Business?
SROs, comprising member-formulated principles and rules, oversee industry or professional activities. Members agree to abide by these or face penalties, although SROs may still be under government regulation.
What Can a Self-Regulatory Organization Do?
Formed by professional groups, SROs can admit, reprimand, or expel members based on established criteria. They ensure accountability through oversight, surveillance, and enforcement mechanisms.
Is FINRA the Only Financial SRO?
No, numerous financial bodies, including various stock exchanges, function as SROs. SROs exist beyond finance, overseeing numerous professional activities.
Is the SEC an SRO?
The U.S. Securities and Exchange Commission (SEC) is a federal regulatory body, not an SRO. However, the SEC oversees organizations like FINRA and deals with appeals related to FINRA actions.
The Bottom Line
Self-regulatory organizations (SROs) create and enforce industry standards, though secondary to government standards and laws. They aim to protect all participating parties within their respective fields.
Related Terms: SEC, FINRA, NYSE, ethics in finance, regulatory bodies.
References
- Cornell Law School. “17 CFR 240.19b-4 - Filings With Respect to Proposed Rule Changes by Self-Regulatory Organizations”.
- FINRA. “About FINRA”.
