A self-regulatory organization (SRO) is a non-governmental organization with the power to exercise some regulatory authority over an industry.

An SRO typically gets its regulatory power from a government agency or legislation. However, an SRO does not necessarily have to get its authority this way. An SRO’s power allows it to ensure that its members comply with the rules. Even though SROs are private organizations, their regulatory power often stems from government delegation, which can influence their independence.

The purpose of an SRO is to provide standards and enforce regulations for its members. An SRO can additionally set standards for entities to become members. This allows SROs to have oversight power within an industry. As a result, SROs can serve as an authority to spot fraud or other illegal practices from within an industry.

Examples of SROs

There are dozens of SROs, but some well-known examples are the Financial Industry Regulatory Authority (FINRA) and the New York Stock Exchange (NYSE). FIRNA is an SRO comprising member firms that include broker-dealers and financial professionals, and who oversees disputes between multiple parties. FIRNA has the authority to license security dealers and audit dealers and firms to ensure compliance with their standards.

Other major self-regulatory organizations include:

• Financial Planning Association (FPA): A professional association representing Certified Financial Planners (CFPs). It provides education, advocacy, and networking opportunities for its members, and promotes the importance of financial planning to the public.
• Chicago Board of Trade (CBOT): A derivatives exchange that specializes in agricultural commodities, currencies, and interest rate futures. It facilitates trading, clearing, and settlement of these derivatives contracts.
• American Council of Life Insurers (ACLI): A trade association representing the life insurance industry. It advocates for industry interests, conducts research, and provides resources to its members.
• Fixed Income Clearing Corporation (FICC): A clearinghouse for fixed-income securities, providing clearing and settlement services for bonds, mortgage-backed securities, and other fixed-income instruments.
• Options Clearing Corporation (OCC): A clearinghouse for options contracts, ensuring the integrity of the options market and managing the risks associated with options trading.
• American Institute of Certified Public Accountants (AICPA): The professional association for Certified Public Accountants (CPAs). It sets ethical standards, conducts exams, and offers continuing education for CPAs. It also advocates for the accounting profession and provides resources to its members.

Financial SROs and SEC Oversight

The Securities Exchange Act of 1934 (“Exchange Act”), Section 6, described the standards and regulatory goals the SRO rules must fulfill. The rule-making process allows the SRO to establish standards that deter fraud and market manipulation and provide penalties for members who violate federal security laws.

Under Section 19, the SEC can enforce actions against SROs that are not complying with rules of good practice and fail to regulate and establish proper penalties for their members. The SEC rarely overturns disciplinary actions administered to members by the SRO. Under Section 19, the SRO must also receive approval from the SEC for any rule changes. This allows the SEC to promote industry-wide standards through rule-making.

Broker-dealer firms must be registered under the Exchange Act and members of a securities association to trade in the over-the-counter market. A securities association must develop rules and disciplinary measures for its members’ violations of regulations and federal security laws. Securities associations have the authority to take regulatory action against members, while the SEC has the power to review the action.

Each securities exchange has operated as an SRO, with the New York Stock Exchange (NYSE) recognized as the largest. Previously, the only SRO registered with the SEC was the National Association of Securities Dealers (NASD); however, in 2007, the NASD and operations of the NYSE merged to form FIRNA. This created a single and efficient regulatory organization by combining the operations of both SROs. FIRNA now has a single platform for investors to pursue arbitration regarding claims against broker-dealer firms.

SRO Effectiveness

In order for an SRO to be effective, it must possess several key characteristics. These include:

• Authority: An SRO needs strong authority outside of governmental oversight to enforce its own rules and standards. Without authority, it is not considered a true SRO and is instead just another form of government. 
• Strong Governance: An SRO must have a transparent process for rule-making and organization. This transparency is what allows the SRO to have strong enforcement mechanisms in place, creating public confidence in its operations.
• Surveillance: Good surveillance measures to monitor members are important for an SRO to keep peace in the markets and oversee complex trading systems. An effective SRO also needs to organize information about disciplinary actions against its members. 
• Thorough Resolution Process: An effective SRO needs a fair and transparent dispute resolution process. It also needs effective measures to deal with conflicts of interest to encourage orderly disputes. 

SRO Challenges

An SRO may face the challenge of “regulatory capture.” This occurs when a regulatory agency becomes dominated by the industry it is supposed to regulate. This can result in the SRO benefiting members it should instead be penalizing or violating rules. Strong and transparent governance is important to avoid the influence of regulatory capture.