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The Financial Industry Regulatory Authority (FINRA) and the US Securities and Exchange Commission (SEC) are two key organizations responsible for maintaining the stability and integrity of US financial markets.
However, while their missions often overlap, they operate differently and regulate distinct areas of the financial world.
In this guide, we will break down the key differences between FINRA and the SEC to provide a clear understanding of their roles, responsibilities, and how they impact financial firms, investors, and the broader market.
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What Is FINRA?
FINRA is a private, nonprofit organization that is a self-regulatory body for brokerage firms and their registered representatives. It was founded in 2007 through the consolidation of the National Association of Securities Dealers (NASD) and the regulatory arm of the New York Stock Exchange (NYSE).
FINRA operates independently but under the SEC’s supervision. This means that while FINRA has its own rules and standards, it must also comply with the SEC's regulations. The SEC's primary role is to regulate broker-dealers by creating and enforcing rules that promote fair and honest practices within the securities industry. While it is not a government agency, FINRA holds significant authority in the financial sector through licensing, oversight, and disciplinary actions.
Why Does FINRA Exist?
FINRA exists to protect investors and maintain fair practices within the securities industry. Its creation addressed the need for an independent organization that could develop and enforce ethical standards among broker-dealers without being a direct arm of the federal government.
Before FINRA, different entities handled various aspects of broker-dealer regulation, leading to inconsistencies and gaps in oversight. By merging regulatory functions, FINRA created a centralized authority focused on investor protection and market integrity.
Through monitoring activities like advertising reviews, licensing exams, and arbitration services for disputes, FINRA works to prevent misconduct and promote transparency in the financial markets.
What Does FINRA Do?
FINRA oversees the operations of broker-dealers and their registered representatives to promote fair practices in the securities industry. Its responsibilities cover several core areas that directly impact how financial firms operate.
Some of FINRA’s primary functions include:
Licensing and Registration: FINRA administers qualification exams and approves licenses for individuals and firms in the securities industry.
Rulemaking and Guidance: It creates rules that broker-dealers must follow and provides interpretive guidance to help firms comply with regulatory requirements.
Market Surveillance: FINRA monitors trading activities across US markets to detect potential fraud, insider trading, or other violations.
Compliance Inspections: It conducts regular examinations of firms to evaluate their compliance programs, internal controls, and overall adherence to FINRA rules, SEC rules, and MSRB rules.
Disciplinary Actions: When firms or individuals break the rules, FINRA can impose fines, suspend licenses, or take other corrective actions.
Investor Education: FINRA offers educational resources to help the public make informed investment decisions and recognize potential risks.
What Is the SEC?
The SEC is a federal government agency responsible for regulating the securities industry at large. Established by Congress in 1934 during the aftermath of the stock market crash of 1929, the SEC was created to restore investor trust and bring transparency to the financial markets.
Unlike FINRA, the SEC has broad authority over public companies, investment advisors, mutual funds, exchanges, and other key players in the securities ecosystem. Its role is grounded in enforcing federal securities laws that govern how securities are issued, traded, and disclosed to the public.
The SEC operates independently within the federal government and reports directly to Congress.
Why Does the SEC Exist?
The SEC exists to safeguard investors and promote confidence in the US financial markets. Its formation was a direct response to widespread abuses and a lack of transparency that contributed to the Great Depression.
Before the SEC was established, few rules governed how securities were issued and traded. Companies could easily mislead investors, and insider trading was rampant. The collapse of trust in the financial system made it clear that government intervention was necessary.
What Does the SEC Do?
The SEC enforces federal securities laws and oversees key participants in the securities industry to protect investors and maintain orderly markets. Its work spans a wide range of activities that influence how companies raise money and how investments are offered to the public.
Some of the SEC’s primary responsibilities include:
Regulating Public Offerings: The SEC reviews registration statements and disclosures to make sure companies provide accurate and complete information before offering securities to investors.
Oversight of Investment Advisors and Funds: It supervises investment advisors, mutual funds, and other asset managers to promote ethical behavior and protect client assets.
Monitoring Trading Markets: The SEC oversees national securities exchanges and alternative trading systems to detect fraud, manipulation, or unfair trading practices.
Investigating Violations: Through its Division of Enforcement, the SEC investigates suspected securities law violations, including insider trading, accounting fraud, and misleading disclosures.
Rulemaking and Policy Development: The SEC drafts and implements regulations that reflect changes in the financial landscape and emerging risks.
Investor Education: It provides resources and tools to help the public make informed investment decisions and recognize warning signs of fraud.
What Is the Difference Between FINRA and the SEC?
While both FINRA and the SEC regulate the financial industry, they do so in distinct ways and at different levels. Understanding these differences is crucial for firms that must comply with both regulators, empowering them with the knowledge to navigate the complex regulatory landscape.
Here are the 7 key differences between FINRA and the SEC, breaking down exactly what sets them apart.
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1. Regulatory Scope and Jurisdiction
The SEC regulates the entire US securities market at a national level. It oversees how securities are offered, traded, and disclosed, focusing on public companies, investment advisors, mutual funds, and securities exchanges. Its authority is grounded in federal securities laws and applies a broad and secure regulatory framework across industries and market participants.
FINRA’s jurisdiction is more specialized. It focuses exclusively on broker-dealers and their registered representatives. FINRA creates operational rules, enforces ethical standards, and monitors activities specifically related to brokerage services and securities transactions conducted by its member firms.
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2. Oversight of Broker-Dealers and Investment Advisors
FINRA is responsible for regulating broker-dealers. These are the firms and individuals that buy and sell securities on behalf of clients or for their own accounts. FINRA sets licensing requirements, monitors trading practices, reviews advertising materials, and conducts examinations to make sure broker-dealers comply with the securities rules.
On the other hand, the SEC — in addition to regulating broker-dealers — also regulates investment advisors and public companies. Investment advisors are firms or individuals who provide advice about securities and manage investment portfolios for a fee.
Unlike broker-dealers, investment advisors are fiduciaries, meaning they must always put their clients' interests ahead of their own. The SEC also has the authority to regulate any broker-dealer directly, but typically relies on FINRA to handle much of the day-to-day oversight.
This division is important because firms must first identify whether their activities classify them as a broker-dealer, an investment advisor, or both.
3. Rulemaking Authority and Enforcement Powers
The SEC has the power to create legally binding regulations under federal law. Its rules are developed through a formal process that includes public comment periods and thorough legal review. Once finalized, SEC regulations have the force of law and apply broadly across the securities industry.
Alternatively, FINRA creates rules specifically for its member firms and registered representatives. The SEC must approve these rules before taking effect, but they do not carry the same broad statutory authority as SEC regulations. FINRA rules are more operational in nature, governing how broker-dealers must conduct their business day-to-day.
When it comes to enforcement, the SEC can bring civil lawsuits, impose fines, suspend licenses, and refer cases for criminal prosecution through the Department of Justice. Its enforcement actions often involve large-scale fraud, insider trading, or violations that affect broad segments of the market.
FINRA enforces its rules through disciplinary actions against individual firms and representatives. It can impose fines, suspend or expel members, and mandate corrective measures. However, its penalties are limited to its jurisdiction and typically focus on violations within the securities industry.
4. Membership Requirements and Registration
FINRA operates as a membership organization. Any firm that wants to act as a broker-dealer in the United States must become a member of FINRA.
Membership requires firms to go through a detailed application process, meet capital requirements, pass qualification exams for key personnel, and agree to ongoing regulatory supervision. Once registered, firms and their representatives must comply with FINRA's rules, pay membership fees, and submit to periodic examinations.
The SEC, by contrast, does not have a membership structure. Instead, firms and individuals register directly with the SEC if they meet specific criteria under federal law.
Investment advisors managing $100 million or more in assets under management (AUM), public companies issuing securities, and exchanges must register with the SEC. Registration involves filing detailed disclosures through systems like EDGAR, undergoing periodic audits, and adhering to federal regulations.
For firms that provide both brokerage and advisory services, this means they may need to register with FINRA as a broker-dealer and with the SEC as an investment advisor. Each registration comes with its own set of obligations, reporting requirements, and compliance challenges.
5. Compliance Examinations and Audits
Both FINRA and the SEC conduct examinations and audits, but their processes, focus areas, and frequency differ significantly.
FINRA conducts regular examinations of its member firms, often annually or biennially, depending on the firm's risk profile. These reviews assess how firms are complying with FINRA rules and applicable securities laws. FINRA examinations focus heavily on sales practices, supervision, recordkeeping, anti-money laundering programs, capital compliance, and customer communications. FINRA may also conduct targeted exams based on emerging risks identified across the industry.
The SEC conducts examinations through its Office of Compliance Inspections and Examinations (OCIE), now part of the Division of Examinations. SEC exams are typically less frequent and narrow in scope. An SEC audit may review a firm's disclosure practices, custody of client assets, cybersecurity protocols, insider trading controls, and overall risk management. Investment advisors, broker-dealers, public companies, and exchanges can all be subject to SEC examinations.
While FINRA exams tend to focus on operational compliance within broker-dealers, SEC audits often assess systemic risks that could impact the broader financial market.
6. Disciplinary Actions and Penalties
FINRA’s disciplinary process focuses on enforcing its own rules and federal securities laws within the brokerage industry. When a violation is identified, FINRA can bring formal disciplinary proceedings against firms and individuals. Potential penalties include fines, suspensions, expulsions, restitution to harmed customers, and mandatory corrective actions. FINRA often resolves cases through settlements, but it also has a separate department that handles arbitrations if disputes are contested.
The SEC, operating at a national and federal level, has a broader range of enforcement tools. It can initiate civil actions in federal court, bring administrative proceedings, and seek injunctions to stop ongoing violations. The SEC can impose much larger monetary penalties, order disgorgement of ill-gotten gains, suspend or bar individuals from participating in the securities industry, and, in serious cases, refer matters for criminal prosecution through the Department of Justice.
A critical difference is that SEC actions often carry reputational damage on a national scale, with enforcement actions made highly visible to the public through press releases and litigation filings. FINRA actions are also public, but generally receive less widespread media coverage unless the case involves a major firm or significant investor harm.
7. Investor Protection and Market Integrity
FINRA and the SEC aim to protect investors and promote fair markets, but they approach it from different angles.
The SEC focuses on systemic investor protection. It establishes disclosure requirements to make sure that investors have access to accurate and complete information before making decisions. It enforces rules that deter fraud, insider trading, and other practices that can undermine public trust in the financial system. The SEC's broad regulatory framework helps maintain the overall integrity and transparency of the markets.
FINRA concentrates on the conduct of broker-dealers at the individual firm and representative level. Its rules emphasize fair dealing, ethical sales practices, and the suitability of client investment recommendations. Through its monitoring, examinations, and enforcement actions, FINRA helps prevent misconduct that could directly harm individual investors.
While the SEC sets the foundation for public confidence in the markets, FINRA addresses the day-to-day behavior of professionals interacting with investors.
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FINRA and SEC Collaboration: When Do Their Roles Overlap?
Although FINRA and the SEC have distinct responsibilities, there are many situations where their roles overlap. Collaboration between the two regulators is common, especially when investigating serious misconduct or coordinating examinations.
Here are the key areas of overlap between the two organizations:
Regulation of broker-dealers: While FINRA handles the day-to-day supervision and operational rule enforcement, the SEC retains ultimate authority over the broader regulatory framework. In practice, this means a broker-dealer firm must comply with both FINRA rules and SEC regulations at the same time. During joint examinations, the SEC may focus on issues like disclosure practices and systemic risks, while FINRA reviews internal supervision, sales practices, and operational compliance.
Enforcement actions: FINRA often investigates misconduct at the broker-dealer level and can refer serious violations to the SEC for further action. Conversely, the SEC may rely on FINRA’s expertise when building cases that involve detailed industry practices or when pursuing complex fraud involving registered representatives.
Information sharing: If one regulator uncovers information that may fall outside its jurisdiction but within the other's, it can pass that information along for appropriate action.
For firms, this collaboration means regulatory obligations are often intertwined. A deficiency identified during a FINRA exam could trigger an SEC investigation if the issues are severe enough, and vice versa. Strong internal compliance programs, regular audits, and proactive risk management are essential to staying on the right side of both regulators.
How to Meet Both FINRA and SEC Regulations
Complying with both FINRA and SEC regulations requires a strategic, organized approach. Firms must recognize that while areas may overlap, each regulator has distinct expectations, priorities, and enforcement styles.
Here are key steps firms can take to meet the demands of both:
Build a Comprehensive Compliance Program: Design a compliance program that addresses the requirements of both FINRA rules and SEC regulations. This includes implementing detailed written supervisory procedures (WSPs), clear recordkeeping policies, employee training programs, and internal controls that reflect the expectations of each regulator.
Conduct Regular Risk Assessments: Identify your firm's specific risks based on its activities, clients, and business model. A risk-based approach allows firms to allocate compliance resources efficiently and prepare for the different focus areas FINRA and the SEC may target during examinations.
Maintain Robust Documentation: Both regulators expect thorough and organized records. Firms should document policies, supervisory activities, employee certifications, customer communications, and corrective actions. Good documentation can make the difference between a clean exam and a lengthy investigation.
Monitor Regulatory Developments: Rules and enforcement priorities evolve over time. Subscribe to FINRA Regulatory Notices and SEC press releases, attend webinars, and follow industry news. Staying informed allows firms to anticipate changes and adapt compliance practices before they become urgent.
Conduct Mock Examinations: Practice exams help identify gaps before a real regulator steps in. Engage compliance consultants like InnReg or use internal audit teams to simulate FINRA and SEC examinations, testing your firm's readiness across different areas.
Foster a Culture of Compliance: Compliance cannot exist in isolation. Leadership must emphasize ethical behavior, transparency, and adherence to regulatory expectations as core business values. A strong culture reduces the likelihood of misconduct and encourages employees to raise concerns early.
Seek Expert Support When Needed: The regulatory landscape can be complex and shifting. Partnering with experienced compliance consultants like InnReg can provide specialized guidance, help interpret regulatory updates, and support your firm during examinations or investigations.
By following these steps, firms can better navigate the complex landscape of FINRA and SEC regulations and strengthen their foundation for long-term success.
How Can InnReg Help?
InnReg is a global regulatory compliance and operations consulting team serving financial services companies since 2013.
We are especially effective at launching and scaling fintechs with innovative compliance strategies and delivering cost-effective managed services, assisted by proprietary regtech solutions.
If you need help with compliance, reach out to our regulatory experts today:
Published on May 9, 2025
Last updated on May 9, 2025
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