BACK TO BASICS: Industry Designations, Part I
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November 12, 2003
Just like any industry, the financial services industry has a host of professional designations for different purposes. These designations are maintained by companies and individuals either for regulatory reasons or to emphasize specialized knowledge in a particular field. Below is a partial list of the many letters you’ll find as you navigate your relationships in this industry. In Part I of this series, we’ll look at terms and regulatory requirements for businesses and what it means to you.
Regulatory Terms for Businesses
FDIC (Federal Deposit Insurance Corporation – Federal Agency)
Background: Formed in 1933, this entity guarantees bank deposits against bank failures up to a certain amount via the Bank Insurance Fund [BIF] or the Savings Association Insurance Fund [SAIF] for thrift banks.
What It Means to You: Currently the FDIC will guarantee up to $100,000 in cash for customer bank accounts. Often times a bank will hold insurance above and beyond the FDIC, with insured amounts varying by company. Check with your bank if you’d like to know the company providing additional insurance on your assets, as well as the specific amounts.
SIPC (Securities Investors Protection Corporation – Non-Profit Corporation)
Background: Formed in 1970, this entity guarantees cash and securities (stocks and bonds) against brokerage firm failures up to a certain amount. Brokers and dealers registered with the SEC are required to be members of the SIPC.
What It Means to You: Currently the SIPC will guarantee up to $100,000 in cash and $400,000 in securities for customer accounts. In the event of a brokerage failure, the SIPC will first attempt to merge the assets of the failed firm into an existing firm. Often times a firm will hold insurance above and beyond the SIPC, with insured amounts varying by firm. Check with your brokerage if you’d like to know the company providing additional insurance on your assets, as well as the specific amounts.
Basel Committee & Basel II
Background: Formed in 1974 by the central banks of 10 leading nations including the US, this international organization has no regulatory authority. However, it does establish best practice supervisory standards and guidelines for the worldwide banking industry. Basel II is a recent standard put forth by the Basel Committee that updates the following three “pillars” for banks: 1) minimum capital requirements, 2) supervisory review of capital adequacy and 3) public disclosure.
What It Means to You: While significant to the banking world, the direct impact you will see is pretty small. Basically, there are new credit risk standards that many banks will maintain, and risk issues in general should be more transparent to the public.
SEC (Securities and Exchange Commission – Government Agency)
Background: The SEC’s website states, “The primary mission of the U.S. Securities and Exchange Commission [SEC] is to protect investors and maintain the integrity of the securities markets.” The SEC relies on Self-Regulatory Organizations [SRO’s] and industry professionals (i.e. accounting firms, brokerages, etc) and the public, to accomplish its mission. The SEC is a rulemaking entity with significant enforcement power. Three common enforcement actions include insider trading, accounting fraud and providing false or misleading information to the public.
What It Means to You: Recent scandals in the securities markets may have created a great deal of skepticism about the SEC, however, it’s important to note that the SEC was never established to “approve” financial statements. It requires their filing for public review only (disclosure). Additional steps are taken when corporate accounting flags are raised, but the governmental entity was not staffed to actively police publicly-held firms. Recent expansion of the SEC may result in a more pro-active approach to corporate accounting review, as well as SRO monitoring.
CFTC (Commodity and Futures Trading Commission – Government Agency)
Background: Formed in 1974, the CFTC is an independent agency that regulates commodity and options markets. They are a rulemaking body that is responsible for the integrity and orderliness of the futures markets.
What It Means to You: While the CFTC is a significant rulemaking and oversight entity, the investing/trading public would more likely deal with the NFA, the SRO that registers individuals and firms in the futures business.
SRO (Self Regulatory Organization – Various Types of Entities)
Background: A self-regulatory organization [SRO] is an entity that is responsible for setting standards for its members through creation and enforcement of rules and regulations.
What It Means to You: Various groups within the financial services industry have rules and regulations specific to its members. These rules and regulations are above and beyond the requirements of the SEC. As an example, an NYSE Specialist is subject to NYSE regulations, as well as SEC regulations. Both parties may get involved with an improper action by an exchange member. Additionally, the NYSE Specialist may be members of other self-regulating entities that guide his or her conduct. When a specific activity is subject to multiple rules, the most stringent rule will typically apply.
MSRB (Municipal Securities Rulemaking Board – SRO)
Background: Formed in 1975, this SRO establishes rules for municipal securities dealers (not issuers).
What It Means to You: Recent stock market declines have pushed more investors into bonds, including municipal bonds. Dealers in this area must comply with both MSRB rules and the SEC. Enforcement of MSRB rules are via the NASD for securities firms and FDIC for banks.
NASD (National Association of Securities Dealers – SRO)
Background: The NASD is the SRO responsible for the operation and regulation of the National Association of Securities Dealers Automated Quotation [NASDAQ] and the over-the-counter [OTC] securities markets. Additionally, the NASD is a primary rulemaking and enforcing entity for member firms and individuals registered in the equities and options brokerage business.
What It Means to You: When dealing with individuals and firms in the securities business, NASD rules will likely apply to those dealings. The nasd.com website has a significant amount of information about licensed individuals and member firms, as well as general information for the investing public.
NFA (National Futures Association – SRO)
Background: The NFA is the SRO for the futures business, monitored by the CFTC.
What It Means to You: Companies and individuals who handle trading or provide customer advice must be registered with the NFA, and comply with its rules.
NYSE (New York Stock Exchange – SRO)
Background: Founded in 1792, the NYSE is an SRO that regulates members of the exchange, as well as exchange activities.
What It Means to You: As stated in the SRO description, NYSE member firms and individuals will be subject to NYSE rules and compliance actions. The investing public can also be more directly impacted by NYSE rules. One such rule is Rule 431, which established Day Trading Margin Requirements for customer accounts.
SICA (Securities Industry Committee on Arbitration – Private Entity)
Background: The SICA’s arbitration process is followed by the securities industry when a customer complaint is unresolved between the two parties.
What It Means to You: If you’ve filed a complaint with a brokerage firm that is not resolved in a satisfactory way, this entity’s code will likely dictate the manner in which your case is arbitrated.
Part II of this series will focus on Designations for Individuals, and will be posted next Wednesday, November 19.
Clare White
Contributing Writer and Options Strategist
Optionetics.com ~ Your Options Education Site
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