SIE cheat sheetSection 4: Overview of Regulatory Framework (9%)
SROs & Industry Oversight
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Self-Regulatory Organizations (SROs)
- Created by the securities industry to regulate itself
- Operate under SEC oversight — SEC has final authority
FINRA
- SRO for all broker-dealers
- Writes and enforces rules for B/Ds and their associated persons
- Operates BrokerCheck (public disclosure system)
- Administers licensing exams (SIE, Series 7, 63, 66, etc.)
- Handles arbitration and mediation of disputes
- Can fine, suspend, bar, or expel members
NYSE / Exchanges
- SROs for their own listed securities
- Set listing standards
- Monitor trading on their exchange
MSRB
- SRO for municipal securities market
- Writes rules — does NOT enforce
- FINRA enforces MSRB rules for B/Ds
- Banking regulators enforce for banks
- Operates EMMA (Electronic Municipal Market Access)
Arbitration vs Mediation
- Arbitration: Binding decision by arbitrator panel
- Mandatory for industry disputes
- Required if in customer agreement (pre-dispute arbitration clause)
- Customer can choose: all public, or majority public + one industry arbitrator
- Decision is FINAL — very limited appeal rights
- Mediation: Voluntary, non-binding negotiation with mediator
- Parties must agree to participate
- Mediator facilitates but does NOT decide
Regulatory Hierarchy
1. Congress (writes securities laws)
2. SEC (enforces federal securities laws, oversees SROs)
3. SROs — FINRA, exchanges, MSRB (self-regulate under SEC)
4. State regulators (Blue Sky Laws — state securities regulations)
Key facts to memorize
- SROs: FINRA (B/Ds), NYSE (exchange), MSRB (munis)
- MSRB writes rules, cannot enforce — FINRA enforces for B/Ds
- Arbitration: binding, final; Mediation: voluntary, non-binding
- SEC oversees SROs; SROs regulate members
- Blue Sky Laws: state-level securities regulations
- FINRA can fine, suspend, bar, or expel members
Mnemonics that stick
- "SRO = Self-Regulate with Oversight (from SEC)"
- "FINRA = the cop on the beat for broker-dealers"
- "Arbitration = Already decided (binding, final); Mediation = Maybe we can work it out (voluntary)"
- "Blue Sky Laws = state laws (blue sky = each state has its own sky/rules)"
- "MSRB writes, FINRA enforces (for B/Ds) — like a teacher writes the test but the principal grades it"
Exam traps
- MSRB writes rules but CANNOT enforce them — enforcement is by FINRA (for B/Ds) or banking regulators
- Arbitration decisions are FINAL and BINDING — extremely limited appeal rights
- Mediation is VOLUNTARY and NON-BINDING — either party can walk away
- SEC oversees SROs but does NOT directly regulate individual reps (FINRA does)
- Blue Sky Laws are STATE regulations — federal securities laws are separate
- Pre-dispute arbitration clauses in customer agreements are enforceable
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