Self-regulatory organizations: what an SRO is for, and the jurisdiction of FINRA, the MSRB and Cboe

What self-regulation does

A self-regulatory organization, or SRO, develops industry rules within a federal framework and operates under SEC oversight. Investor protection and fair markets are central purposes. Self-regulation does not replace federal securities law. Separate three questions: who writes a rule, who must follow it, and who enforces it.

FINRA: member firms and associated persons

The Financial Industry Regulatory Authority, FINRA, is a registered securities association. Its jurisdiction centers on member broker-dealers and their associated persons, including registered representatives. It writes rules, examines members, and brings disciplinary actions within its authority. It also enforces MSRB rules for its members and their associated persons. A member firm's municipal securities business therefore involves both FINRA oversight and MSRB rules. FINRA membership is not a universal license to regulate every financial business.

MSRB: municipal market rulemaking

The Municipal Securities Rulemaking Board, MSRB, writes rules for brokers, dealers, and municipal securities dealers in municipal securities activities, and for municipal advisors. Its role includes protecting investors and municipal entities. It does not enforce its own rules. FINRA, the SEC, and appropriate bank regulators enforce those rules according to their jurisdiction. The MSRB can assist with enforcement and examinations without becoming the enforcing authority. Do not confuse regulating municipal market professionals with regulating municipal issuers directly.

Cboe: an exchange SRO

Cboe is an exchange SRO with its own exchange rules. An exchange's enforcement responsibilities cover its members and their associated persons. Think exchange membership and exchange rules, not a mandate over every broker-dealer or every options transaction wherever executed. A firm may belong to FINRA and an exchange, so regulatory obligations can overlap.

SEC oversight and exam reasoning

The Securities Exchange Act provides for SEC oversight of SRO rulemaking and permits the SEC to amend SRO rules through prescribed procedures. Some categories of rule changes take effect upon filing; prior affirmative approval is not required for every change. Final SRO disciplinary actions are subject to review by the appropriate regulatory agency. Applying for review does not itself stay a sanction.

For exam questions, identify the regulated party before choosing the organization. A FINRA member and its registered representative point toward FINRA. Municipal professional conduct points toward MSRB rules, with enforcement assigned separately. An exchange member's exchange-rule obligations point toward the exchange. The central distinction is that FINRA and exchanges have enforcement responsibilities, while the MSRB writes rules that other authorities enforce.