A brokerage firm fails. The S&P 500 crashes 20%. A registered representative is sued for unsuitable advice. Each scenario triggers a different regulator, agency, or insurance fund. Knowing who covers what is exam-day gold.
The Securities and Exchange Commission (SEC) is the federal agency at the top. Congress created it under the Securities Exchange Act of 1934. The SEC enforces federal securities laws, registers broker-dealers, oversees self-regulatory organizations, and pursues fraud cases. It does not insure investors against losses.
SROs are industry-funded bodies that write and enforce rules under SEC oversight. Member firms pay dues and fees that finance operations.
- FINRA (Financial Industry Regulatory Authority) regulates broker-dealers and their registered representatives. It was born from the 2007 merger of NASD and NYSE Member Regulation.
- MSRB (Municipal Securities Rulemaking Board) writes rules for municipal securities dealers, but it has no enforcement arm. FINRA enforces MSRB rules against broker-dealers; bank regulators enforce them against bank dealers.
- Exchanges (NYSE, Nasdaq, CBOE) operate as SROs over their listed securities and member firms.
Common mistakes
- Believing SIPC covers market losses. SIPC only triggers when a firm fails. A $50,000 stock crash with a solvent broker pays you nothing.
- Confusing FDIC's $250,000 with SIPC's $500,000. FDIC = bank deposits. SIPC = brokerage assets.
- Thinking the MSRB enforces its own rules. MSRB writes muni rules; FINRA enforces them against broker-dealers.
Bottom line
- SEC sits at the top: federal securities regulator created by the Securities Exchange Act of 1934, and oversees all SROs
- FINRA regulates broker-dealers and enforces MSRB rules; the MSRB only writes muni rules
- SIPC covers $500,000 per separate customer ($250,000 cash sublimit), and only when a firm fails (never market loss)
- FDIC insures $250,000 per depositor per bank per ownership category, deposits only
Exam shortcut
SIPC = securities ($500K total / $250K cash). FDIC = bank deposits ($250K). Different acronyms, different worlds, different dollar caps. "Advice for a fee" triggers the Investment Advisers Act. "Transactions for commissions" stays under broker-dealer rules. Five participants, five verbs: issuer creates, underwriter distributes, market maker quotes, custodian holds, transfer agent records.
The full lesson (about 1,744 words, 12 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- A1
- A2
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