Securities Industry Essentials (SIE) ExamOverview of Regulatory FrameworkHard
A new broker-dealer firm is applying for registration with the Securities and Exchange Commission (SEC). As part of this process, the firm must also become a member of a Self-Regulatory Organization (SRO). For a firm engaged in general securities business, which SRO membership is mandatory?
- AThe Chicago Board Options Exchange (CBOE).
- BThe Securities Investor Protection Corporation (SIPC).
- CThe Financial Industry Regulatory Authority (FINRA).
- DThe Municipal Securities Rulemaking Board (MSRB).
Show answer & explanationAnswer & explanation
Correct answer: C. The Financial Industry Regulatory Authority (FINRA).
For broker-dealers engaged in general securities business, membership in FINRA is mandatory. FINRA is the primary SRO responsible for regulating the activities of broker-dealers and registered representatives.
Why the other options are wrong
- A. CBOE is an options exchange and an SRO, but membership is only required for firms dealing specifically in options, not general securities.
- B. SIPC is an insurance fund for customers of failed broker-dealers, not an SRO that firms 'join' for regulatory oversight.
- D. MSRB membership is only mandatory for firms dealing in municipal securities, not general securities.
Mandatory SRO Membership
Broker-dealers engaged in general securities business are legally required to become members of the Financial Industry Regulatory Authority (FINRA), which acts as their primary Self-Regulatory Organization (SRO).
- FINRA is the primary SRO for general securities firms.
- Membership is mandatory for most broker-dealers.
- FINRA oversees sales practices, exams, and compliance.
- Other SROs are specialized (e.g., MSRB for munis, exchanges for listed securities).
Memory trick: To be a BD, you need SEC's nod and FINRA's 'Firm-ID'.