Self-Regulatory Organizations (SROs)

Above the firms and brokers in the securities industry sits a layer of regulators that are not part of the government at all. A self-regulatory organization, or SRO, is a private, industry-run body that Congress and the SEC have authorized to write and enforce the rules its own members must follow. The thinking is that the people closest to the business are often best placed to police it, as long as a government regulator is watching over their shoulder. That is exactly the setup: every SRO operates under SEC oversight, but each writes its own rulebook and, in most cases, enforces it.

The chain of authority runs top to bottom: Congress passes the laws, the SEC turns them into oversight, and the SROs handle the rulemaking and policing of their own corners of the market.

FINRA, the Financial Industry Regulatory Authority, is the big one. It is the largest SRO in the country and the primary regulator of broker-dealers and the people who work for them. If you become a registered representative, FINRA is the body whose rules govern your daily conduct, and the one that wrote this exam. Its core jobs:

• Licensing and registration: it administers the qualification exams (the SIE, the Series 7, and the rest) and maintains the CRD, the Central Registration Depository that tracks every registered person's history.
• Rulemaking: it writes and enforces the conduct rules member firms live by, covering areas like suitability, communications with the public, and margin.
• Market surveillance: it watches trading for manipulation, front-running, and other abuses.
• Enforcement: when a firm or person breaks the rules, FINRA can fine, suspend, bar, or expel them.
• Dispute resolution: it runs the largest securities arbitration and mediation forum in the country, which is where most customer-broker disputes are settled instead of in court.

FINRA arbitration

This forum gets its own exam attention, mostly for the dollar thresholds that decide how a case is heard. Keep two separate lines straight:

• A claim of $50,000 or less uses simplified arbitration: a single arbitrator decides on the written submissions, with no hearing unless a party asks for one.
• A claim of more than $50,000 and up to $100,000 is still decided by a single arbitrator, but now with a hearing.
• A claim of more than $100,000 goes to a panel of three arbitrators.
• Disputes between industry members (firm versus firm, or a firm versus one of its own registered people) are mandatory arbitration: they must go through FINRA rather than the courts.
• An arbitration award is final and binding, with very narrow grounds for appeal.

The MSRB, the Municipal Securities Rulemaking Board, is the SRO with a twist the exam loves. It writes the rulebook for firms and advisors that deal in municipal securities, but it has no enforcement power of its own. It makes the rules and then hands enforcement to others:

• FINRA enforces MSRB rules against broker-dealers.
• Bank regulators (the OCC and the Federal Reserve) enforce them against bank dealers.
• The SEC sits above the MSRB with ultimate oversight.

A few MSRB rules turn up by name on the SIE:

• Rule G-37 curbs pay-to-play. A municipal finance professional whose political contribution to an official crosses a small threshold (more than $250 to an official the professional cannot even vote for) can trigger a two-year ban on the firm doing negotiated municipal business with that issuer.
• Rule G-17 is the fair-dealing rule: dealers must deal fairly and honestly with everyone in a municipal securities transaction.
• EMMA, the Electronic Municipal Market Access system, is the MSRB's free public website for municipal securities data, official statements, and ongoing disclosures.

CBOE and the exchange SROs

The exchanges are SROs too. The CBOE (Chicago Board Options Exchange) both runs an options market and regulates the options trading on it, and the stock exchanges like the NYSE and Nasdaq set and enforce the rules for trading on their own floors. Each one polices its own venue, all under the SEC.

The whole chapter compresses into one table. If you can rebuild this from memory, you can answer almost any SRO question on the exam:

The one exception to memorize: the MSRB is the only SRO that writes rules but cannot enforce them. FINRA enforces MSRB rules against broker-dealers, and the bank regulators (the OCC and the Federal Reserve) enforce them against bank dealers.