FINRA vs. SEC: What’s the Difference?

Both protect investors, but there are some key differences

Learn the differences between FINRA and the SEC, and how the two financial regulatory bodies work to protect investors
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If you follow financial news, you probably hear a lot about FINRA and the SEC. Financial Industry Regulatory Authority (FINRA) and the U.S. Securities and Exchange Commission (SEC) are both regulatory bodies. The big difference between the two is that the SEC is a federal government agency regulating financial markets while FINRA oversees broker-dealers and operates under the direction of the SEC.

Understanding each agency’s scope is important for investors. But the interplay between the two agencies can get confusing. Keep reading to learn the fundamental differences between FINRA vs. the SEC.

What’s the Difference Between FINRA vs. SEC?

The Financial Industry Regulatory Authority, or FINRA, and the U.S. Securities and Exchange Commission, or the SEC are both regulatory agencies that oversee U.S. financial markets. But they have different missions, scopes, and enforcement powers. 

FINRA is a self-regulatory organization (SRO) that operates under the direction of the SEC, which is a federal government agency. Both FINRA and the SEC are charged with protecting investors. While the SEC has broad power to regulate securities markets to ensure fairness and efficiency, FINRA regulates brokers and broker-dealers.

FINRA SEC
Not-for-profit self-regulatory organization (SRO). Federal government agency that oversees FINRA.
Established in 2007. Established in 1934.
Primarily oversees broker-dealers and securities agents. Has broad regulatory and enforcement powers over securities markets.

FINRA

FINRA is a not-for-profit entity that’s authorized by Congress to regulate broker-dealers in the U.S. It was established in July 2007 through the merger of the National Association of Securities Dealers (NASD) and the regulatory operations of the New York Stock Exchange.

FINRA oversees licensing requirements for brokers and their agents, including the Series 7 exam, which is required for any professional who sells securities. The agency oversees more than 624,000 broker-dealers nationwide. It’s also tasked with ensuring that advertisements for securities are truthful and provide full disclosure and that investments are only sold when they’re suitable for investors’ needs.

One of FINRA’s key duties is to investigate potential securities violations. When FINRA determines that a rule has been violated, it takes disciplinary action. A broker-dealer may opt to settle a rule violation. Otherwise, FINRA may refer the complaint to its Office of Hearings Officers for a formal hearing.

FINRA’s BrokerCheck tool allows investors to verify whether a person or firm is legally authorized to sell securities, as well as whether they’re permitted to offer investment advice. It also maintains a record of customer complaints or enforcement actions against registered brokers, including those that have been barred.

SEC

The SEC was established by Congress in the aftermath of the stock market crash of 1929. Through the Securities Exchange Act of 1934, Congress created the SEC and gave it sweeping authority over all facets of the U.S. securities market.

The federal agency has the following divisions:

  • Corporate Finance: Ensures that investors have access to complete and accurate information, both during the company’s initial public offering (IPO) and on an ongoing basis.
  • Economic and Risk Analysis: Analyzes data and trends to assist with all SEC functions, including rulemaking, examination, and enforcement.
  • Enforcement: Investigates potential violations of federal securities laws and litigates civil enforcement cases in federal courts and administrative hearings.
  • Examinations: Oversees the SEC’s National Examinations Program and promotes compliance with federal securities law.
  • Investment Products: Oversees investment companies, including those that offer products like mutual funds and exchange-traded funds (ETFs), and investment advisers.
  • Trading and Markets: Creates and maintains standards for fair and efficient markets by regulating broker-dealers, SROs (including FINRA, stock exchanges, and clearing agencies), and transfer agents.

The SEC is overseen by five commissioners, each of whom is appointed by the president and approved by the U.S. Senate. The president also chooses one commissioner to serve as chairman, the agency’s highest rank. No more than three commissioners can belong to the same political party to ensure that the SEC remains nonpartisan.

The SEC maintains the EDGAR database, which allows individuals to research financial information and filings for any publicly traded company, mutual fund, ETF, or variable annuity.

The Bottom Line

Unlike the SEC, which is a federal agency, FINRA is not a government body. The SEC is tasked with regulating the securities market, including broker-dealers and registered investment advisors. Broker-dealers and their agents are required to register with FINRA. FINRA ensures compliance with its rules as well as broader securities laws set forth by the SEC by regular examination of processes and practices at broker-dealer firms. 

Key Takeaways

  • FINRA is a self-regulatory organization (SRO) that operates under the SEC, which is a federal government agency.
  • While both agencies protect investors, FINRA primarily regulates broker-dealers and their agents, while the SEC has broad authority over securities markets.
  • The SEC was established in 1934 in the aftermath of the stock market crash that led to the Great Depression. 
  • FINRA was created in 2007 following the consolidation of some operations of the National Association of Securities Dealers and the New York Stock Exchange.

Article Sources

  1. U.S. Government Accountability Office. "Securities Regulation: SEC Could Take Further Actions to Help Achieve Its FINRA Oversight Goals.” 

  2. FINRA.org. "About FINRA: What We Do." 

  3. Cornell Law School Legal Information Institute. “Self Regulatory Organization.”

  4. FINRA.org. "Series 7 – General Securities Representative Exam."

  5. FINRA.org. "About FINRA."

  6. FINRA.org. "Enforcement.”

  7. Library of Congress. “Signing of the Securities Exchange Act of 1934.

  8. U.S. Securities and Exchange Commission. "Current SEC Commissioners.”