The stock market crash of 1929 led to major legislation that would forever alter the landscape of the securities markets. The ensuing economic analysis of the crash made it clear that the securities markets and their participants needed greater governmental regulation. This led to the creation of the National Association of Securities Dealers, a self-regulatory agency that oversaw all of the activities of all broker-dealers and registered securities personnel nationwide. This organization has since been reorganized into the Financial Industry Regulatory Authority (FINRA), which continues its function of regulating all aspects of the securities markets in America today. (Find out which exam you need to begin your career as an investment professional. Check out Breaking Down Financial Securities Licenses.)
TUTORIAL: Introduction To The Federal Reserve
As mentioned previously, FINRA springs from its predecessor organization, the National Association of Securities Dealers (NASD). This organization was created in 1939 as a means of implementing various provisions of the Securities Exchange Act of 1934 and the Maloney Act of 1938. This self-regulatory organization eventually spun off its own independent computer-based electronic trading exchange known as Nasdaq, which stands for the National Automated Securities Dealers Automated Quotation System. This computer-based trading system merged with the American Stock Exchange (AMEX) in 1998 and became completely separate from the NASD. FINRA was then created in 2007 when the NASD and the regulatory branch of the New York Stock Exchange (NYSE) merged into a new singular entity. FINRA now stands as the official self-regulatory organization for the securities industry in America.
FINRA is made up of approximately 3,000 employees and has headquarters in both Washington, D.C. and New York City, with another 20 regional offices located throughout the country. It collects hundreds of millions of dollars every year in revenues that are generated from member dues, fines levied upon members and assessments from both registered personnel and those who apply to become such. As a self-regulatory organization, it is separate from any governmental regulatory authority, but is subordinate to the SEC, and was created with its permission. It has the authority to create, implement and enforce various regulations pertaining to securities trading, licensure and personnel and is now ruled by a board of governors. FINRA's by-laws mandate that the board consists of the following members:
- The CEO of FINRA
- The CEO of the NYSE
- 11 public governors
- 10 industry governors
The industry governors must include:
- A floor member
- An independent dealer/insurance affiliate
- An investment company affiliate governor
- Three governors of small firms
- One governor of a mid-sized firm
- Three governors of large firms
Those who fall into the latter three categories are elected by the other members of FINRA.
There are several committees, such as the audit committee and other special committees that perform various functions or implement specific programs. For example, a special committee was created to review FINRA's examination procedures in light of the Bernie Madoff scandal. FINRA also offers an ombudsman who serves as a neutral and confidential contact for both the public and member firms and representatives who have questions or concerns about FINRA practices or regulations. (We'll help you clarify which exam you should take. See Series 63, Series 65 Or Series 66?)
Purpose and Function
FINRA regulates the securities industry in many capacities, and has broad powers over the securities industry that must be obeyed by all investors and participants. There are four main avenues that FINRA pursues in its effort to protect investors and oversee the securities markets in America:
Investor Protection and Education – FINRA has undertaken a number of projects aimed at both researching and educating the public on the world of investments. Its website has several educational modules that cover various investment topics, such as investment fraud and financial education for members of the military. FINRA also sponsors an arbitration program that allows investors to take brokers and other registered representatives and their firms through a mediation process in the event of a dispute. Almost all new account applications that are used by member firms now include wording that assures customers of this right - and also forces them to waive their right to use the court system instead. The arbitration system consists of thousands of qualified members and panelists who are trained to provide unbiased judgment in hearings between investors and brokers as well as member firms and their employees.
FINRA also offers grants to various local groups and organizations that seek to educate investors and train them in how to invest sensibly. Its website, www.finra.org, offers a plethora of resources to prospective investors, from educational modules to broker disciplinary history to a breakdown of how the fees charged by a specific mutual fund affect its performance over time.
Broker-Dealer Registration – All companies who wish to sell securities in America are required to register with FINRA in order to become a licensed broker-dealer. Any firm that fails to do so is subject to fines, penalties and other legal action and can be shut down if necessary.
Securities Licensure and Exams – FINRA oversees over 600,000 personnel in the U.S. in several capacities. First, it requires all of them to undergo a rigorous background check in an effort to screen out those who have criminal records. Each of them must also be properly licensed before they are allowed to conduct securities transactions of any kind. In order to become licensed, each registered representative must pass an exam that tests them on the subject matter pertinent to the securities and transaction with which they will be dealing. There are numerous licenses in the securities industry, such as:
Series 6 – This license allows holders to sell packaged investment products, such as mutual funds, variable annuities and unit investment trusts. This license is popular with financial planners, insurance agents and bank employees.
Series 7 – This license allows holders to sell virtually every type of security or investment in existence, except for futures contracts, real estate and life insurance.
Series 63 – This license covers state blue-sky laws and must be obtained by every registered representative in addition to the Series 6, 7 or other license.
- Series 4, 24 and 26 – These licenses are for those who supervise registered representatives and cover all relevant administrative and regulatory topics, such as branch margin requirements and options regulations.
Recordkeeping and Disciplinary History – FINRA keeps extensive records of all of the activities of every member firm and representative in the securities industry. Firms and employees are required to report all of the activities in which they engage to FINRA on a timely basis. Any disciplinary action that is taken against any rep is recorded permanently on form U6, which can be accessed by the public on FINRA's website. (Personal financial information can be used to evaluate potential employees. How will you rate? Check out Bad Credit Puts The Brakes On Broker Career.)
The Bottom Line
FINRA is dedicated to ensuring that the markets are operated fairly and individual investors are protected from unscrupulous brokers and institutions. It accomplishes this task through various avenues of regulation, and its website has a plethora of resources for brokers and investors. For more information on FINRA, log on to its website at http://www.finra.org/ or consult your broker or financial adviser.