A Self-Regulatory Organization or SRO is an organization that is formed to regulate certain professions or industries. They are usually non-governmental organizations, established with the aim of creating rules to promote order among businesses and organizations.
Self-Regulatory Organizations exist either in the absence of government regulation or to support or operate alongside such regulation. They are extremely helpful in an industry or profession where trust is low. The thing about SROs is that they do not need a grant of authority from the government to enforce their regulations.
What is FINRA?
In the United States, the Securities and Exchange Commission sanctioned the Financial Industry Regulatory Authority (FINRA), along with the national stock exchanges, for setting forth rules and regulations on trading securities and enforcing them. However, it is the SEC that is the highest regulating body in the US in terms of securities.
FINRA’s aim is to protect investors and ensure that the operations of the securities industry are done in fairness and honesty. There are more than 4,250 brokerage firms and about 162,155 branch offices which all must be overseen by the FINRA.
Characteristics of a Self-Regulatory Organization
An ideal and functional self-regulatory organization should be able to demonstrate the following traits:
Legislative authority – The SRO should be given the legislative authority that allows it to create policies and enforce them in a specific industry.
Strong governance – The SRO must be transparent and not easily swayed. It must establish a defined process that it will use for gathering input regarding how rules are created.
Management of conflict – As there will always be conflict, SROs must adhere to a distinct process by which conflicts are handled, as well as ways to resolve these.
Oversight – With thousands of members under its watchful supervision, SROs need to establish an effective means of watching over its members and making sure that they adhere to the rules and regulations and operate ethically.
Surveillance methods – SROs should invest in modern surveillance that can be used to keep track of the current events in the different professions or industries it oversees.
Enforcement program – There must be a strong enforcement program that works hand-in-hand with government agencies to ensure that its regulations are followed. Such a program can also protect its members from any violations and ensure that those who are undergoing investigations are given due process.
Regulatory database – SROs need to maintain a database of regulated persons or entities, as well as records of previous complaints and disciplinary actions taken.
Disruption procedures – In the event of a disruption, especially technology-wise, SROs must put in place procedures that can detect any disruption and recover computer files and databases.
Resolution of disputes – SROs should create a process of resolving disputes that is transparent and consistent while ensuring fairness in the treatment of the accused.
Benefits of a Self-Regulatory Organization
Ever since SROs were created, many professions and industries have seen much improvement, as compared to when they were under direct government supervision. The three important benefits of SROs are:
Expertise – SROs are widely considered experts in their fields and, therefore, know a great deal about the markets they work in. This, in turn, is helpful to the members as they can be called in to participate in deliberations and learn more about the ins and outs of the industry.
Higher standard of conduct – With the establishment of SROs, member organizations follow a certain standard of conduct that helps promote ethical ways of doing business. This can lead to investors and consumers becoming more confident in the market.
Heightened supervision – SROs do not rely on people’s taxes but are instead funded by the organizations that are under its wings. Therefore, the government is able to save by foregoing the need to maintain an agency for such a purpose.
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep learning and advancing your career, the additional CFI resources below will be useful:
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