self-regulatory organization (SRO)

A body which manages its own affairs and has its own rules of conduct, eliminating the need for government legislation. Lloyd's and the London Stock Exchange are two such bodies. From time to time the government may threaten to introduce legislation to ensure public control, usually if some adverse event has taken place. These bodies then modify their own rules to guard against any repetition of the problem.

A self-regulatory organization (SRO) is an organization that exercises some degree of regulatory authority over an industry or profession. The regulatory authority could be applied in addition to some form of government regulation, or it could fill the vacuum of an absence of government oversight and regulation. The ability of an SRO to exercise regulatory authority does not necessarily derive from a grant of authority from the government.

In the securities industry, the federal regulatory authority — the Securities and Exchange Commission — is established by federal statute. The SEC delegates authority to the National Association of Securities Dealers (the NASD) and to the national stock exchanges (e.g., the NYSE) to enforce certain industry standards and requirements related to securities trading and brokerage.

Because of the prominence of the SROs in the securities industry, the term SRO is often used too narrowly to describe an organization authorized by statute or government agency to exercise control over a certain aspect of the industry.