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Table of Contents

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) writes and enforces rules that govern registered brokers and broker-dealer firms in the United States.
  • FINRA also administers the qualifying exams for securities professionals.
  • FINRA provides resources, such as BrokerCheck, that help to protect investors.
  • The general criticism of all self-regulatory agencies, including FINRA, is that they do just enough to maintain the public's trust.
  • FINRA's monthly report of disciplinary activity refers only to formal actions and leaves out informal ones such as cautionary letters to firms or individuals.

Understanding FINRA

Oversight Role

The Financial Industry Regulatory Authority (FINRA) is the single largest independent regulatory body for securities firms operating in the United States. It oversees more than 3,400 brokerage firms, 152,000 branch offices, and nearly 617,550 registered securities representatives, as of 2020. FINRA has 19 offices across the United States and approximately 3,600 employees.

FINRA regulates the trading of equities, corporate bonds, securities futures, and options. It has also been authorized by Congress to protect the interests of investors.

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.

Rules Enforcement

In its enforcement capacity, FINRA has the power to take disciplinary actions against registered individuals or firms that violate its rules.

In 2020, it initiated 808 disciplinary actions, levied fines totaling $57 million, and ordered restitution of $25.2 million to investors. It also expelled two member firms and suspended another two, while barring 246 individuals from the securities business and suspending another 375.

Also in 2020, it referred 970 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, a searchable database of brokers, investment advisors, and financial advisors. BrokerCheck includes certifications, education, and any enforcement actions. It draws from FINRA's Central Registration Depository (CRD) database, which contains the records of individuals and firms in the securities business in the United States.

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

Benefits of FINRA

FINRA's main benefit for investors is protection from potential abuses and unethical conduct within the financial industry. FINRA resources (such as the aforementioned BrokerCheck) allow investors to determine if someone claiming to be a broker is actually a member in good standing.

By banning brokers who violate its rules of conduct, FINRA stops many financial crimes from taking place.

FINRA's commitment to, and responsibility for, these functions was made clear by the combining of the NASD and the NYSE's regulation operations into one organization.

The SEC approved the consolidation of these two 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 acquired by the NYSE in 2008. The NYSE was acquired five years later by the Intercontinental Exchange (ICE). The Chicago Climate Exchange, a market for trading greenhouse gas emissions allowances, was shut down after the purchase by ICE of its parent company Climate Exchange Plc in 2010.

While FINRA is a private, not-for-profit, regulatory organization, its creation was approved by the SEC in 2007.

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. It 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 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 result in about half of all members being ranked as below-average. Unsurprisingly, self-regulatory agencies rarely rank their members.

What's FINRA?

FINRA is the Independent Financial Industry Regulatory Association. It creates and enforces the rules that govern U.S. registered brokers and broker-dealers. It was formed in 2007.

How Does FINRA Discipline Offenders?

A disciplinary action can be formal or informal. Formal actions can involve a fine, a fine and order for restitution, suspension, or expulsion from the industry. Informal actions can include cautionary letters and orders to fix a particular problem.

Does FINRA Provide Services to Investors?

Yes. Beyond its regulatory services, FINRA's Investor Education Foundation provides investors with a variety of personal finance and investment information, courses, research, and tools (like BrokerCheck and Fund Analyzer). These can help investors better understand the roles that finance and investing can play in their lives.

Article Sources
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  1. FINRA. "About FINRA."

  2. FINRA. "Five Steps to Protecting Market Integrity."

  3. U.S. Securities and Exchange Commission. "SEC Gives Regulatory Approval for NASD and NYSE Consolidation."

  4. FINRA. "Statistics."

  5. FINRA. "Locations."

  6. FINRA. "About FINRA."

  7. FINRA. "Qualification Exams."

  8. FINRA. "BrokerCheck."

  9. FINRA. "Central Registration Depository (CRD)."

  10. FINRA. "NASD and NYSE Member Regulation Combine to Form the Financial Industry Regulatory Authority - FINRA."

  11. GHG Management Institute. "The Chicago Climate Exchange Closure, A Vote For Robust GHG MRV?"

  12. New York Stock Exchange. "The History of NYSE."

  13. WarrenSenate.gov. "Letter to Richard G. Ketchum, Chairman and Chief Executive Officer, FINRA, May 11, 2016."

  14. National Bureau of Economic Research. "The Market for Financial Adviser Misconduct: Abstract."

  15. FINRA. "Behind the Process: How an Enforcement Action Becomes an Enforcement Action."

  16. FINRA. "For Investors."

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