Self-Regulatory Organization (SRO)

A self-regulatory organization (SRO) is an entity such as a non-governmental

organization, which has the power to create and enforce stand-alone industry and
professional regulations and standards on its own. In the case of financial SROs, such
as a stock exchange, the priority is to protect investors by establishing rules,
regulations, and set standards of procedures which promote ethics, equality, and
professionalism.

 An self-regulatory organization (SRO) is one that has the power to set industry
standards and regulations through its own efforts.
 Although SROs can be privately owned, the government can still dictate their
broader policies.
 Industries can band together and start their own SROs, which allow them to
maintain competitiveness and safety concerns if there is a lack of governmental
oversight.

Understanding SROs
Although SROs are private organizations, they are still subject to government-
imposed regulation to a degree. However, the government does delegate some aspects
of the industry oversight to self-regulatory organizations.

Any applicable laws or governmental regulations will apply and be foremost while
those set by the SRO become supplemental.

Since the SRO has some regulatory influence over an industry or profession, it can
often serve as a watchdog to guard against fraud or unprofessional practices. The
ability of an SRO to exercise regulatory authority does not stem from a grant of power
from the government.

Instead, SROs often accomplish control through internal mechanisms that regulate the
flow of business operations. The authority may also come from an external agreement
between like businesses. The purpose of these organizations is to govern from within
while avoiding ties to a country's governance.

Authority of Self-Regulatory Organizations

Once the self-regulating organization sets regulations and provisions to guide activity,
those rules are binding. Failure to operate within the given regulations can have
consequences, and a firm must understand those rules when it considers associating
with the SRO.

Further, the SRO may set standards which a professional or business must meet to
become a member, such as having a specified educational background or working in a
manner that is considered ethical by the industry.
An additional function undertaken by the SRO is educating investors on appropriate
business practices. The SRO will provide information and allow input on any areas of
interest or concern which may include fraud or other unethical industry activities. The
SRO may also help investors understand how their investments work and advise on
methods to mitigate potential risks associated with the securities industry.

Examples of Self-Regulatory Organizations Include:

 The New York Stock Exchange (NYSE)
 The Financial Planning Association (FPA)
 Chicago Board of Trade (CBOT)
 American Council of Life Insurers (ACLI)
 Financial Industry Regulatory Authority, Inc. (FINRA)
 Fixed Income Clearing Corporation (FICC)
 Options Clearing Corporation (OCC)
 American Institute of Certified Public Accounts (AICPA)

There may also be self-regulatory organizations specific to the country they serve,
such as the Investment Industry Regulatory Organization of Canada (IIROC) and the
Association of Mutual Funds in India (AMFI). Some industries may also create SROs
with examples being the American Bar Association and the Institute of Nuclear Power
Operations (INPO).

Real World Example: FINRA

As an example, the Financial Industry Regulatory Authority (FINRA) has the power
to license securities dealers. Their authority includes the ability to audit dealers and
associated firms and to ensure compliance with the standards currently in place. The
goal is to promote ethical industry practices and improve transparency within the
sector.

FINRA also oversees arbitration between investors, brokers, and other involved
parties. This oversight provides a standard to address various disputes although it also
limits actions a firm may take outside of the system. FINRA is not a governmental
organization. Instead, it is a private organization populated by member firms who
consist of financial institutions, like broker-dealers and financial professionals.

The rules and regulations promoted and enforced by FINRA are, thus, under the
auspices of a self-regulatory framework. Governmental laws or mandates fall under
the control of the Securities and Exchange Commission (SEC). The laws of the federal
or state level of government will supersede any FINRA-specific regulations.
Indian Capital Market Regulators –
Role and functions
Often in the haste of becoming a market participant/ trader/ investor, we forget to know the
roots governing the Stock Market. This means that we overlook the rules, regulations,
regulatory bodies who guide the flow of Indian Capital Market. This becomes important for
us to know because they have the major impact on our financial decisions. At times, any
change in the rules or regulations of the Act, governing the Indian Capital Market tends to
bring substantial change on market psychology or sentiments. This eventually affects our
financial decisions.

In this article, we will understand as to who regulates the Indian capital market, rules &
regulations governing the stock market, brief on the Stock Market, roles and functions of
capital markets.

While investing in Stock Market some prefer to take less risk and go short-term. Others may
prefer to take a long-term leap. On this basis of risk, the financial market is divided into two
types – Money Market and Capital Market. Money Market Securities are short-term in nature
while Capital Market pitches long-term investments.

The Ministry of Finance (MoF), the Securities & Exchange Board of India (SEBI) and the
Reserve Bank of India (RBI) are the three regulatory authorities governing Indian capital
market.
 Ministry of Finance (MoF)
The Department of Economic affairs directly manages the Capital Markets segment under the
directions of MoF. This segment formulates the rules for the efficient growth of the Stock
Market which includes derivatives, debt, and equity. It also formulates regulations for
safeguarding the interest of the investors.

This segment regulates the Indian Capital Markets through the following laws:

 Depositories Act, 1996

 Securities Contract (Regulation) Act, 1956

 Securities and Exchange Board of India Act, 1992

Reserve Bank of India (RBI)

The Reserve Bank of India Act, 1934 governs policies framed by the Reserve Bank of India.
The functions of RBI in this regard are as follows:

 Implementation of Monetary and Credit policies

 Issuance of Currency Notes

 Government’s Banker

 Banking System Regulator

 Foreign Exchange through Foreign Exchange Management Act, 1999

 Managing payment & settlement system

Apart from the above functions, RBI is also actively involved in developing the financial
market.

Securities & Exchange Board of India (SEBI)

 The Securities & Exchange Board of India (SEBI) Act, 1992 regulates the functioning of
SEBI. SEBI is the apex body governing the Indian stock exchanges.
The primary functions of SEBI are as follows:

Protective Functions
It checks Price rigging
II. Prohibits insider trading
III. prohibits fraudulent and Unfair Trade Practices

Development Functions
I. SEBI promotes training of intermediaries of the securities market.
II. SEBI tries to promote activities of stock exchange by adopting a flexible and adaptable
approach

Regulatory Functions
I. SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries
such as merchant bankers, brokers, underwriters, etc.
II. These intermediaries have been brought under the regulatory purview and private
placement has been made more restrictive.
III. SEBI registers and regulates the working of stock brokers, sub-brokers, share-transfer
agents, trustees, merchant bankers and all those who are associated with stock exchange in
any manner
IV. SEBI registers and regulates the working of mutual funds etc.
V. SEBI regulates takeover of the companies
VI. SEBI conducts inquiries and audit of stock exchanges.

The participation in the Indian Stock Market of both the domestic or foreign financial
intermediaries are governed by the regulations framed by SEBI. Additionally, Foreign
Portfolio Investors (FPIs) can participate in Indian Stock Market after registering them with
an authorized Depository Participant.

National Stock Exchange of India (NSE)

NSE is responsible for formulating and implementing the rules pertaining to:

 Registration of Members

 Listing of Securities
 Monitoring of Transactions

 Compliance

 Other additional functions related to the above functions

NSE itself is regulated by SEBI and is under regular vigilance for all regulatory compliances.

Stock Exchange
In simple terms, a Stock Market is a platform where people buy and sell stocks, prices of
which are set according to the prevalent demand and supply situation. It is very similar to a
marketplace where traders buy and sell goods, quoting prices on the basis of the demand for
the good and the availability or supply of it.

The term trade, in the context of the bourses, means the transfer of money from the seller to
the buyer in exchange for a security/ share. The price at which the seller sells or the buyer
buys is listed on the stock exchange. You can easily trade through a trading member
registered on a Stock Exchange.

As per National Securities Clearing Corporation Limited “A Trading Member means any
person admitted as a member in any exchange in accordance with the Rules, Bye-laws and
Regulations of that Exchange.”

The Stock Market doesn’t differentiate between any citizen of the country. Outside
investments were only permitted in the 1990s and can take place through either Foreign
Direct Investments (FDIs) or Foreign Portfolio Investments (FPIs). Thus, the Stock Market
participants range from small individual investors to Insurance Companies, Banks, Mutual
Fund companies, Manufacturing companies etc.

However, the rules and regulations formulated by SEBI remain the same for all types of
market participants and everybody is obligated to abide by such rules and mandates.

Functions of Capital Market

The growth of Economy:
The capital market reflects the condition of the economy and also accelerates the economic
growth. It allocates the resources from the people who have surplus capital to who require
capital. By this, we can conclude that capital market helps in the growth of the economy as
well as the trade of both public and private sectors. This leads to balanced economic growth
in the country.

Encourage people to save:

Development of capital markets has helped the banking institutes to provide facilities and
provisions to encourage people to save more. People might have just invested in land or gold
in the non-existence of a capital market

Stabilizing stock prices:

Capital Markets has reduced speculation activities and also provided capital to the borrowers
at the lowest interest rate as possible. This helped in keeping away the prices of stocks from
fluctuating.

Role of Capital Market

Proper Allocation of Funds:
Capital Market is an important platform for allocating idle savings from the people to
productive channels of an economy. It puts the idle funds in proper investment.
Formation of capital:
Capital market helps in the formation of capital by adding capital to the existing capital in the
economy. This helps in the expansion of capital in the economy

Platform for Investment:

Capital market raises resources for longer periods of time. Thus it provides an investment
avenue for people who wish to invest resources for a long period of time. It provides suitable
interest rate returns also to investors. Instruments such as bonds, equities etc.
definitely provide diverse investment avenue for the public.

Accelerates Economic Development:

The financial requirements of the businesses are met by the capital market as it makes funds
available for the longer period. Capital market also helps in the research and development.
This results in increasing the productivity of the economy.

Provides Service:
Capital Market provides various services like medium and long-term loans consultancy
services. export finance etc