The Financial Industry Regulatory Authority (previously known as the National Association of Securities Dealers) is the largest self-regulatory organization (SRO) in the securities industry in the United States. An SRO is a membership-based organization that creates and enforces rules for members based on federal securities laws.
These SROs are overseen by the Securities and Exchange Commission (SEC) and are the front line in regulating broker-dealers. (To learn about the differences between these two organizations, see How does FINRA differ from the SEC?)
TUTORIAL: Investing 101: Types of Investments
The story behind the founding of FINRA begins with the National Recovery Act (NRA), which was passed by Congress on June 16, 1933, as part of President Franklin Roosevelt's "New Deal" initiative. The NRA's goal was to promote industrial recovery and reform during the Great Depression. A portion of the act, known as Title I, called for the establishment of a code of conduct to ensure fair competition across all industries.
As a result of Title I, the Investment Bankers Code Committee was formed. When the U.S. Supreme Court invalidated the NRA on May 27, 1935 (on the grounds that it gave the government powers that were too broad), the investment banking industry changed the name of the committee to the Investment Bankers Conference Committee and voluntarily continued its work.
The group, which later became known as the Investment Banker's Conference, Inc., developed a code of conduct and procedures for addressing complaints. By late 1937, the group was ready to push for a legislative recognition of its status as a self-regulatory organization with enforcement powers. The legislation, known as the Maloney Amendment, was signed by President Roosevelt on June 25, 1938. It amended the Securities Exchange Act of 1934, adding Section 15A. (To find out more about the Securities Act, see Policing The Securities Market: An Overview Of The SEC.)
On July 30, 2007, the NASD and NYSE Member Regulation merged to become the Financial Industry Regulatory Authority (FINRA).
FINRA is lead by a board of governors that consists of 23 members, including five staff positions. Specific departments include:
- Member Regulation: This department consists of two sections, the department of risk oversight and operational regulation, and the department of sales practices regulation. The former focuses on operational issues; the latter addresses issues involving the investing public.
- Enforcement: The enforcement department's role is self-evident. Policing the activities of member firms is FINRA's primary role.
- Emerging Issues: This department focuses on regulatory policy and programs.
- Dispute Resolution: FINRA is the largest arbitration organization in the securities industry. Settling disputes between investors and member firms is a high-profile role.
Technology plays an important role in today's automated financial markets. It is used both to facilitate trading and to monitor trades.
Together, these departments are responsible for a wide range of activities, including ensuring compliance with trading rules, money laundering regulations, broker registration and certification, investor dispute resolution, ongoing broker education and more.
(To learn more about online investing, see 10 Tips For Choosing An Online Broker.)
The capital markets work largely on faith. Investors need to believe that they are not being taken advantage of, in order to have the confidence required to put their money into the hands of FINRA members. FINRA's mission includes "protecting investors and earning their trust." In order to fulfill that mission, FINRA has the enforcement authority to discipline member firms, including the ability to levy fines and even expel members from the industry.
FINRA monitors trading activity on selected global markets, using technology to track trading patterns in an effort to uncover wrongdoing. The group also reviews advertising materials so that member firms do not mislead investors. A strong, mandatory education and licensing program requires financial services professionals to take tests in order to receive certification and to participate in ongoing educational efforts.
The group has a long history of innovation. Once the owner of the Nasdaq, one of the world's most successful over-the-counter markets, the group divested itself of this holding in order to focus on its core mission. (To learn more about the Nasdaq, see The NYSE And Nasdaq: How They Work.)
The Bottom Line
In the wake of massive abuses perpetrated by the securities industry in recent years, investors can't help but question the value of FINRA and other regulators. For the most part, the regulators do a good job of policing the brokerage community, but the best way to avoid problems is for investors to do their homework. For more on FINAR rules, see On The Record: Communications With The Public and Correspondence That Pushes The Envelope.
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