Self-Regulatory Organization (SRO)

Self-Regulatory Organization (SRO)

A self-regulatory organization (SRO) is a private, membership-based entity that creates and enforces industry rules and professional standards. SROs are common in finance but also exist in other sectors (law, accounting, insurance, energy). They aim to promote ethical conduct, protect clients and investors, and reduce industry misconduct through internal oversight.

Key takeaways

• SROs set and enforce rules among their members but do not replace government regulation.
• Their rules are binding for members and may include licensing, exams, codes of conduct, and disciplinary measures.
• Governments often retain ultimate authority; statutory regulators can review or supersede SRO actions.
• Prominent financial SROs include FINRA and major exchanges such as the NYSE.

How SROs operate

• Membership: Industry participants choose or are required to join an SRO and agree to its rules as a condition of doing business.
• Rulemaking and enforcement: SROs adopt standards for behavior and operations, monitor compliance, and can discipline members (fines, suspensions, expulsion).
• Education and dispute resolution: Many SROs provide investor education, publish guidance, and operate arbitration or dispute-resolution forums.
• Interaction with government: SROs operate under the overarching legal framework of the jurisdictions they serve. Government regulators may delegate certain oversight responsibilities to SROs but retain enforcement power and the ability to review SRO rule changes.

Authority and limits

SRO rules are binding on members, but they are secondary to statutory and regulatory law. Failure to comply with an SRO’s rules can trigger internal sanctions; violations of law remain subject to governmental enforcement. In some jurisdictions, specific procedural steps are required when SROs change trading or market rules (for example, certain U.S. financial SROs must file Form 19b-4 with the SEC to justify rule changes affecting trading).

Examples of SROs

Financial and professional SROs include:
* Financial Industry Regulatory Authority (FINRA)
* New York Stock Exchange (NYSE)
* Chicago Board of Trade (CBOT)
* Fixed Income Clearing Corporation (FICC)
* Options Clearing Corporation (OCC)
* American Institute of Certified Public Accountants (AICPA)
Other countries and industries have their own SROs, such as the Investment Industry Regulatory Organization of Canada (IIROC) or the Association of Mutual Funds in India (AMFI).

Case study: FINRA

FINRA is a private organization that regulates broker-dealers and associated firms in the U.S. Its responsibilities include:
* Licensing and qualification exams for securities professionals
* Auditing and surveillance of member firms
* Enforcing conduct rules and disciplinary actions
* Administering arbitration between investors, brokers, and firms
Although FINRA sets and enforces rules for its members, the Securities and Exchange Commission (SEC) supervises FINRA and federal securities laws take precedence over FINRA rules.

Common questions

What powers can an SRO exercise?
* Admit, discipline, suspend, or expel members; set qualification and conduct standards; conduct surveillance and exams; provide education and arbitration services.

Is FINRA the only financial SRO?
* No. Many exchanges, clearinghouses, and professional associations operate as SROs domestically and internationally.

Is the SEC an SRO?
* No. The SEC is a federal regulator established by law. It oversees SROs like FINRA but is not membership-based.

Bottom line

SROs are industry-led organizations that create and enforce standards among their members to promote integrity, reduce misconduct, and protect consumers. They play a complementary role to governmental regulators: effective at industry-specific supervision but ultimately subject to statutory law and public oversight.