Financial Industry Regulatory Authority (FINRA)

What Is the Financial Industry Regulatory Authority (FINRA)?

The Financial Industry Regulatory Authority (FINRA) is an independent, nongovernmental organization that writes and enforces the rules governing registered brokers and broker-dealer firms in the United States. Its stated mission is "to safeguard the investing public against fraud and bad practices." It is considered a self-regulatory organization.

FINRA was created as the result of the consolidation of the National Association of Securities Dealers (NASD) and the member regulation, enforcement, and arbitration operations of the New York Stock Exchange (NYSE) in 2007. The consolidation was meant to do away with overlapping or redundant regulation and reduce the cost and complexity of compliance.

Key Takeaways

  • The Financial Industry Regulatory Authority (FINRA) is an independent, nongovernmental organization that writes and enforces the rules governing registered brokers and broker-dealer firms in the United States.
  • In addition to overseeing securities firms and their brokers, FINRA administers the qualifying exams that securities professionals must pass to sell securities or supervise others who do.
  • FINRA provides resources, such as BrokerCheck, that help to protect investors.
  • The general criticism of all self-regulatory agencies, such as FINRA, is that they do just enough to maintain the public's trust.

Understanding FINRA

The Financial Industry Regulatory Authority (FINRA) is the single largest independent regulatory body for securities firms operating in the United States. FINRA oversees more than 3,500 brokerage firms, 154,000 branch offices, and nearly 625,000 registered securities representatives, as of 2019. FINRA regulates the trading of equities, corporate bonds, securities futures, and options.

The Financial Industry Regulatory Authority (FINRA) has the power to fine or ban brokers and brokerage firms that violate its rules.

FINRA has 19 offices across the United States and over 3,000 employees. In addition to overseeing securities firms and their brokers, FINRA administers the qualifying exams that securities professionals must pass to sell securities or supervise others who do. Those include, for example, the Series 7 General Securities Representative Qualification Examination and the Series 3 National Commodities Futures Examination.

In its enforcement capacity, FINRA has the power to take disciplinary actions against registered individuals or firms that violate the industry's rules. In 2019, it reported that it initiated 854 disciplinary actions, levied fines totaling $39.5 million, and ordered restitution of $27.9 million to investors. It also expelled 6 member firms and suspended another 21, while barring 348 individuals from the securities business and suspending another 415. In 2019, it referred 827 fraud and insider trading cases to the Securities and Exchange Commission (SEC) and other government agencies for prosecution.

For investors who are shopping for a broker or want to check up on their current one, FINRA maintains BrokerCheck. It is a searchable database of brokers, investment advisors, and financial advisors. BrokerCheck includes certifications, education, and any enforcement actions. BrokerCheck is based on FINRA's Central Registration Depository (CRD) database, which contains the records of individuals and firms in the securities business in the United States.

Benefits of FINRA

FINRA's main benefit is to protect investors from potential abuses and ensure ethical conduct within the financial industry. FINRA resources, such as BrokerCheck, allow investors to determine if someone claiming to be a broker is actually a member in good standing. By banning brokers that violate its rules of conduct, FINRA stops many financial crimes from taking place. Furthermore, FINRA made responsibility for these functions more clear by combining them in one organization.

The Securities and Exchange Commission approved the consolidation of the two previous organizations in July 2007. In announcing its formation, FINRA described a broad mandate that included responsibility for "rule writing, firm examination, enforcement and arbitration and mediation functions, along with all functions that were previously overseen solely by NASD, including market regulation under contract for Nasdaq, the American Stock Exchange, the International Securities Exchange, and the Chicago Climate Exchange." The American Stock Exchange was subsequently renamed NYSE American, and the Chicago Climate Exchange, a market for trading greenhouse gas emissions allowances, shut down in 2010.

Criticism of FINRA

FINRA faces much of the same type of criticism that is often applied to any self-regulatory organization. Critics, such as Senator Warren of Massachusetts and Senator Cotton of Arkansas, claim that FINRA does not do enough to protect investors. In particular, an academic study by Egan, Matvos, and Seru showed that there were issues with repeat offenders. They found that financial advisors with past histories of misconduct were several times more likely to commit offenses in the future. FINRA may have been too restrained in exercising its powers.

The general criticism of all self-regulatory agencies, such as FINRA, is that they do just enough to maintain the public's trust. In this view, self-regulatory agencies have an inherent conflict of interest. While members are interested in keeping the public's trust, that interest only goes so far. Members need to weed out the worst offenders, but they don't want the spotlight on themselves. For example, it might be possible to rank all members for integrity. Yet, that would necessarily leave about half of all members ranked as having below-average integrity. Unsurprisingly, self-regulatory agencies rarely rank members.

Article Sources

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  1. FINRA. "Five Steps to Protecting Market Integrity." Accessed Sept. 3, 2020.

  2. U.S. Securities and Exchange Commission. "SEC Gives Regulatory Approval for NASD and NYSE Consolidation." Accessed Sept. 3, 2020.

  3. FINRA. "Statistics." Accessed Sept. 3, 2020.

  4. FINRA. "Locations." Accessed Sept. 3, 2020.

  5. FINRA. "Qualification Exams." Accessed Sept. 3, 2020.

  6. FINRA. "Central Registration Depository (CRD)." Accessed Sept. 3, 2020.

  7. FINRA. "NASD and NYSE Member Regulation Combine to Form the Financial Industry Regulatory Authority - FINRA." Accessed Sept. 3, 2020.

  8. NYSE. "History of the American Stock Exchange." Accessed Sept. 3, 2020.

  9. Greenhouse Gas Management Institute. "The Chicago Climate Exchange Closure, A Vote for Robust GHG MRV?" Accessed Sept. 3, 2020.

  10. Sen. Elizabeth Warren and Sen. Tom Cotton. "Letter to Richard G. Ketchum, Chairman and Chief Executive Officer, FINRA, May 11, 2016." Accessed Sept. 3, 2020.

  11. National Bureau of Economic Research. "The Market for Financial Adviser Misconduct." Accessed Sept. 3, 2020.

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