FINRA vs. the SEC: What Are the Differences?

Written by Drew ChenelerUpdated: 17th Sep 2021
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Before taking the leap and investing your hard-earned money, one of the first things you should do is check for legitimacy.

Now that many investors do things online, it’s riskier to deal with money, especially when it comes to large amounts.

Investors that are looking into hopping into the market may have noticed both SEC-qualified and FINRA regulated.

Below, we’ll not only define them but explain what they mean for you and your investments.

FINRA vs. SEC Overview

Before investing, it’s recommended to take a look at financial organizations that are backing investments.

Two of the most common financial organizations are the Securities Exchange Commission (SEC) and the Financial Industry Regulatory Authority(FINRA).

While they sound completely different, they have similarities, though their role in regulating finances and investments is different.

While FINRA deals with licensing in most cases, SEC is there to protect investors. Below, we’ll get into more detail, making clear the things you need to look for before investing.

Understanding FINRA

While FINRA has the same ring as government-run entity, it’s not. You might be surprised to know that the FINRA is a non-profit and worked to enforce a certain set of rules based on federal laws.

The FINRA is one of the frontline workers when it comes to regulating brokers and dealers, working to ensure that more than 3,700 firms are complying with the best and most fair practices.

Understanding U.S. Securities and Exchange Commission (SEC)

The SEC is there to help the investor, doing everything in their power to protect them. The SEC knows that there are some companies out there with lots of money and lots of power, overpowering the voice of small investors.

The SEC dates all the way back to the Great Depression, springing up as a way to restore investor confidence after such as a substantial crash.

If the SEC has reason to doubt companies that offer securities, they can move to bring civil actions upon them, creating an in-depth investigation that will leave no stone overturned until investor safety is guaranteed.

>> More: How to Start Investing

What Are the Differences Between FINRA and the SEC?

While the FINRA is there to keep an eye on stockbrokers and brokerage firms, the SEC is there is keep the playing field fair for the investor. Even if the FINRA has deemed a business safe, the SEC can overturn if they feel that they are not being fair to all investors.

Additionally, the SEC is a federal agency that’s been put in place since the world was recovering from the Great Depression.

The FINRA is not related to the government and must actually answer to the SEC If any issues happen to arise.

Therefore, it is the SEC that has the final say and that oversees any of the new laws or regulations that the FINRA wants to try and put out.

>> More: How to Make Money in Stocks

What Does FINRA Regulated Mean?

While this is not a government institution, it’s still an entity that counts a lot in the world of investing. In order to be FINRA regulated, companies must fill out an application, pay fees to become a member, and comply with all of the rules set out by the FINRA.

It’s not the easiest task and not one that all brokers will take the time to do.

For that reason, investors can really tell how the company feels about their image, observing firsthand whether they care to preserve it and make it seem like they are to be trusted.

What Does SEC-Qualified Mean?

The SEC is there for the investor, and it’s no easy task to become SEC-qualified either. They are there to keep things fair in the market and observe what online stock brokers and traditional brokers are doing.

The organizations that wish to become SEC certified must do so by starting a process that could take them some time.

First of all, they have to provide a ton of documentation about themselves along with a detailed breakdown of their finances.

The SEC wants financial information to be transparent, allowing investors and other companies interested in investments the opportunity to take a look.

As part of the investigation before approval, the SEC could request an audit, ensuring that all legal financial paperwork is properly filled out and filed.

If for any reason the SEC suspects that practices are unsafe or unfair, they have the right to step in and rate the company is not secure.

If they do so, companies risk their reputation and could lose critical investments from individuals that were interested in growing their funds along with them.

>> More: What Is a Brokerage Account?

FINRA Rule Making Process

The FINRA can add more rules though they have to go through an extensive 10-step process in order to do so. To make official rules that brokers, and stockholders, are required to follow, they must:

  1. Propose a new rule
  2. Receive an internal review
  3. Present the idea of the new rule in front of a committee
  4. Submit the approved idea to the FINRA board
  5. Regulatory Notice Process (acceptance or denial)
  6. Filing with the SEC
  7. SEC registers law in Federal Register
  8. FINRA can respond to comments and suggestions from SEC
  9. SEC official approval
  10. Regulatory Notices (notes approval and changes the rules)

>> More: How to Research Stocks

Bottom Line: FINRA vs. the SEC

When it comes to finding a financial advisor or a company that you want to invest in, the last thing you want to do is sacrifice your safety.

That’s why institutions like the FINRA and the SEC exist. While one is there to regulate the broker, the other is there for the investor, no matter how much money they have to invest.

Companies can choose whether they get SEC-Qualified or FINRA-Regulated, which says a lot about how they hold themselves up as a company.

IF you’re looking to invest, make sure that you keep a lookout for companies associated with these associations, knowing that you’re in good hands while investing and that you’ll get the most out of your money, and investee, while it’s in the market.

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Drew Cheneler
Drew Cheneler

Drew is our Co-Founder and is a recognized Credit, Small Business, and Personal Finance Expert. He has been featured in CNBC, Fox Business News Section, The Huffington Post, Business.com, Moneyunder30, US Chamber of Commerce, and more. He is known for breaking down complex personal finance topics into action-oriented advice, so you can make the most of your hard-earned money. Drew attended the U.S. Coast Guard Academy where he majored in Business Management with a focus on Information Systems.