Financial Industry Regulatory Authority (FINRA)

What Is the Financial Industry Regulatory Authority (FINRA)?

The Financial Business Regulatory Authority (FINRA) is a self-regulatory organization that oversees the securities industry in the United States. It assures dealers, brokers, and other financial institutions follow fair practices, ensuring the stability of the U.S. financial system.

The main objective of FINRA is to maintain the integrity of the financial system by holding participants to a high ethical standard. Its purpose is to protect the investing public from fraud and unethical behavior.

FINRA was formed in 2007 by the National Association of Securities Dealers (NASD) merger with the New York Stock Exchange’s (NYSE) member regulatory, enforcement, and arbitration activities.

The FINRA Foundation helps individuals achieve financial stability, invest for long-term objectives, and avoid fraud.

The Foundation’s efforts are directed toward investors, military personnel, low-income working individuals, and families. The activity is carried out with organizations devoted to the Foundation’s mission.

What Does FINRA Do?

FINRA performs many duties under the Securities and Exchange Commission (SEC) supervision.

To uphold its mission, it has 19 main offices, 149,887 branch offices, and 3,600 employees across the country to closely monitor the U.S. financial markets and ensure that they remain fair and honest.

Oversees and Regulates Brokers 

FINRA oversees and regulates the brokerage industry, stock brokers, and exchange markets. 

As of 2021, it oversees 3,394 Registered Securities Firms (Brokerage Firms) and 612,457 Registered Securities Representatives (Brokers).

Sets Rules That Brokers Must Follow

FINRA has the power to take disciplinary action against registered firms or individuals that violate the set rules. 

In 2021, FINRA received 14,311 investor complaints, and a total of $103 million in fines were imposed. It also ordered $47 million worth of restitution.

It expelled 1 member firm and suspended 3 firms, also barring 269 individuals and suspending 386 from the securities business.

Maintains BrokerCheck Database

FINRA has a searchable database called BrokerCheck for investors to find registered brokers and investment advisors. It includes employment history, certifications, licenses, education, and any enforcement actions against brokers.

BrokerCheck uses FINRA’s Central Registration Depository (CRD) database, which contains records of individuals and firms working in U.S. securities businesses.

Ensures Brokers Are Compliant

In promoting regulatory compliance among its members, FINRA’s compliance tools are available to brokers and firms on its website. The tool contains checklists, templates, and directories.

These tools help brokers and firms fulfill regulatory obligations, implement written supervisory procedures, and create appropriate policies.

Brokers who break the rules may be subject to fines, suspension, or barred from the industry by FINRA. Any disciplinary actions taken by FINRA will be recorded on its website so potential customers can check a broker’s record before doing business with them.

Offers Dispute Forums

FINRA provides a platform for customers and brokers to resolve complaints without going to court. 

Dispute Resolution provides a fair, efficient, cost-effective forum for resolving complaints between investors, securities firms, and individual brokers. 

FINRA organized a task force to investigate possible modifications to its arbitration and mediation forum to ensure that it meets the increasing demands of parties. 

The task force comprised persons from the public and private sectors with diverse interests in securities dispute resolution.

Most FINRA mediations end with both parties agreeing even though mediation has no binding power. Once both sides sign a settlement agreement, that finalizes the deal and makes it legally enforceable.

Maintains Market Transparency

FINRA works to keep the market transparent. The technology section monitors the equities markets and detects market manipulation or fraud.

It has one of the world’s largest data processors, processing roughly 600 billion daily transactions to detect potential abuse.

Algorithms and artificial intelligence are being utilized to protect investors and guarantee market integrity and can flag anything suspicious.

Provides Resources and Tools for Investors

A significant part of FINRA’s job is to give investors the data and resources they need to make knowledgeable decisions about their assets. It can also help them avoid doing business with unethical people.

To address this, FINRA provides plenty of resources for investors, including articles and calculators on personal finance and investing, as well as free online courses. 

FINRA’s toll-free helpline is also available to assist investors in understanding investments or any hard sell attempts by brokers. Senior citizens have a dedicated helpline for them.

FINRA Key Departments

These are FINRA’s key departments:

  • Member Regulation Department: Ensures that members follow industry rules and regulations.
  • Market Regulation Department: Monitors trading activity in U.S. equities, options, and fixed-income markets through surveillance, examinations, and investigations.
  • Enforcement Department: Investigates potential misbehavior and enacts disciplinary action when needed.
  • Transparency Services Department: Creates and updates databases with current and historical market information to help investors make better-informed decisions about securities trading.
  • Registration and Disclosure Department Provides registration and testing for securities industry personnel.
  • Dispute Resolution Department: Operates a conflict resolution center for investors, investment firms, and their registered employees.

FINRA’s other regulatory operations include the following:

  • The Office of General Counsel: Conducts investigations into potential misconduct and sends out appropriate disciplinary action when needed.
  • The Office of Fraud Detection and Market Intelligence: Responsible for gathering and sharing accurate market information on securities not traded on exchanges.
  • The Office of Invest Education: Provides investors with financial tools and educational resources.
  • Advertising Regulation: Monitors advertising to prevent investors from being misled.
  • Corporate Financing: Prevents fraudulent corporate offerings and unfair underwriting compensation.

FINRA Licensing and Registration

To ensure competence and credibility among financial firms and professionals, FINRA has set some licensing and registration procedures. All companies and individuals must register with FINRA before doing business related to securities with the public. 

To become registered, securities professionals must pass qualifying exams administered by FINRA to demonstrate competence. Continuing education programs are also required to be completed.

The Securities Industry Essentials (SIE) exam is the introductory-level exam that assesses the candidate’s fundamental knowledge of the industry. To be registered, the candidate must pass the SIE and the qualifying exam for the business of interest.

The licensing and registration of U.S. broker-dealer firms, branch offices, and their associated individuals are accomplished through the Central Registration Depository program. 

The CRD program covers employment histories; disclosure records; fingerprint submissions; collection and disbursement of registration-related fees, qualification exams, and continuing education sessions.

FINRA Offices

FINRA has 19 locations spread around the country where firms conduct business and disputes arise.

FINRA_OFFICE

Importance of FINRA

The operations of FINRA serve many benefits to the U.S. finance industry. True to its mission, FINRA:

  • Protects investors from potential abuse and misconduct in the financial industry. Cheating, manipulation, and fraudulent behavior among financial companies are minimized.
  • Boosts investor confidence in institutions and markets. Investors feel secure knowing it is unlikely they will experience fraud. At the same time, financial institutions are confident that there is a suitable platform for doing business.
  • Provides an accessible platform to check registered members. With resources such as BrokerCheck, investors can confirm if the brokers are members in good standing. 
  • Promotes competence through administering exams that ensure that anyone who wants to sell securities to investors has a good understanding of financial products.

Criticisms of FINRA

FINRA is dedicated to addressing criticisms such as the following:

  • Self-Regulatory Limits: Being a self-regulatory organization and not a government agency, some argue that FINRA does just enough to keep the public trust. 
  • Repeat Offenders: There were many cases of repeat offenders. Financial advisors with misconduct histories were more likely to commit further offenses in the future.
  • Excessive Bureaucracy: Some argue that FINRA’s bureaucracy has become outrageous. For instance, a financial advisor who wants to help clients invest in stocks has to learn about complex broker-dealer regulations and the features of different life insurance policies.
  • Overly Punitive. Critics claim that FINRA is too eager to take punitive action rather than working with businesses to bring them into conformity.

FINRA vs SEC

SEC is an independent government agency that has authority over the securities market. It examines corporate finance, economic and risk analysis, enforcing rules, investment management, and trading and markets. 

FINRA, on the other hand, is a private self-regulatory agency that works under the supervision of the SEC. FINRA ensures that all U.S. stockbrokers and brokerage firms operate legally and appropriately in their respective markets.

In the aftermath of the 1929 stock market crash that ushered in the Great Depression, Congress passed the U.S. Securities Act of 1933 and the Securities and Exchange Act of 1934, creating the SEC.

FINRA came about as a consolidation of the NASD and the member regulation, enforcement, and arbitration operations of the NYSE in 2007.

FINRA_vs_SEC

Final Thoughts

FINRA is a self-regulatory organization that oversees the U.S. securities industry thereby ensuring the stability of the U.S. financial system.

Key departments are in place to perform FINRAs duties. This includes Member Regulation Department, Market Regulation Department, Enforcement Department, Transparency Services Department, Registration and Disclosure Department, and Dispute Resolution Department.

FINRA has 19 branches spread across the United States.

To ensure competence and credibility among financial firms and professionals, FINRA has set some licensing and registration procedures. 

FAQs

FINRA oversees brokers' and dealers' behavior in the securities market. It protects investors against fraudulent acts by setting rules and regulations, imposing disciplinary actions for offenders, and ensuring agency compliance among members. It also offers dispute resolution forums and provides a platform for settlement.
SEC is an independent government agency that oversees the whole securities market and ensures the integrity of the financial industry. FINRA, on the other hand, is a private self-regulatory organization supervised by SEC that oversees brokers' and dealers' behavior.
Yes, FINRA is an independent self-regulatory organization. It can independently create and enforce its industry-specific regulations and standards.
Any business seeking to operate as a broker-dealer in the U.S. must register with FINRA. All firms, regardless of whether they generate income through buying/selling securities or providing investment advice, must complete this process before legally being allowed to pursue said activities.
Various sanctions are applied to persons who violate FINRA rules, including fines, suspensions, and bars from the brokerage industry. The organization's sanction guidelines provide an overview of the types of disciplinary actions in misconduct cases.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.