FINRA: Explained | TIOmarkets
BY TIO Staff
|July 9, 2024The Financial Industry Regulatory Authority (FINRA) is a non-governmental organization that regulates member brokerage firms and exchange markets in the United States. It is the successor to the National Association of Securities Dealers, Inc. (NASD). Its role is to protect investors by ensuring the broker-dealer industry operates fairly and honestly.
FINRA is not part of the government. It is a not-for-profit organization authorized by Congress to protect America’s investors by making sure the broker-dealer industry operates fairly and honestly. It does this by writing and enforcing rules governing the activities of 3,700 broker-dealers with 630,000 brokers, examining firms for compliance with those rules, fostering market transparency, and educating investors.
History of FINRA
The Financial Industry Regulatory Authority (FINRA) was established in July 2007, but its roots can be traced back to the establishment of the Securities Exchange Act in 1934. This act was part of the government's response to the 1929 stock market crash and the ensuing Great Depression.
FINRA was created through the consolidation of the enforcement arm of the New York Stock Exchange, NYSE Regulation, Inc., and the National Association of Securities Dealers, Inc. (NASD). The merger was approved by the Securities and Exchange Commission (SEC) and NASD members, leading to the formation of FINRA.
Role of FINRA
FINRA has a wide range of responsibilities within the financial industry. It is responsible for regulating all securities firms that do business with the public; it also regulates investment advisers, including those who are also brokers or dealers. FINRA has the authority to discipline firms and individuals who violate the rules.
FINRA also has a role in training and educating industry professionals. It offers a variety of resources for professionals to improve their knowledge and skills, including online courses, seminars, and webinars. It also provides tools and resources for investors to help them make informed decisions about their investments.
Structure of FINRA
FINRA is governed by a Board of Governors, with the majority being public governors and the remainder being industry governors. The CEO of FINRA, who is appointed by the board, is responsible for FINRA's day-to-day operations. FINRA is divided into several departments, each with a specific focus, such as enforcement, market regulation, and investor education.
FINRA operates from Washington, D.C., and New York, with 20 regional offices around the United States. It is funded by assessments on member firms' income and their number of registered representatives, fees for its various regulatory activities, and fines it levies for rules violations.
FINRA's Regulatory Activities
FINRA carries out its regulatory activities in several ways. It conducts on-site examinations of broker-dealers, reviews their financial and operational condition, and monitors their compliance with financial responsibility rules. It also examines broker-dealers' business conduct to ensure they are complying with FINRA's rules and federal securities laws.
FINRA also has the authority to take disciplinary actions against its members who violate its rules or federal securities laws. These actions can include fines, suspensions, and expulsion from the industry.
FINRA's Rulemaking Process
FINRA's rulemaking process involves several steps. First, FINRA staff identifies a need for a new rule or a change to an existing one. This need can be identified through a variety of sources, including input from member firms, investor complaints, examination findings, or changes in the securities industry or financial markets.
Once a need for a new rule or rule change is identified, FINRA staff drafts the proposed rule or rule change. The draft is then reviewed by FINRA's senior management and the board of directors. If approved, the proposed rule or rule change is filed with the SEC, which publishes it for public comment. After the comment period, the SEC reviews the comments and decides whether to approve the proposed rule or rule change.
FINRA's Enforcement Actions
When FINRA determines that a member firm or individual has violated its rules or federal securities laws, it can take enforcement action. This can include imposing fines, suspensions, or expulsions. In some cases, FINRA may also refer the matter to the SEC or other authorities for further action.
FINRA's enforcement actions are designed to deter misconduct and improve market integrity. They also serve to educate the industry and the public about the consequences of violating FINRA's rules and federal securities laws.
FINRA's Role in Investor Protection
Investor protection is a key part of FINRA's mission. It works to protect investors in several ways, including through its regulation of broker-dealers, its enforcement actions, and its investor education programs.
FINRA's rules require broker-dealers to deal fairly with their customers and to disclose material facts about investments and their potential risks. FINRA also provides tools and resources to help investors make informed decisions about their investments. These include BrokerCheck, a free tool that allows investors to research the professional backgrounds of brokers and brokerage firms, and the FINRA Investor Education Foundation, which provides free, high-quality financial education materials.
FINRA's Investor Complaint Program
FINRA operates an Investor Complaint Program that allows investors to report problems with their brokerage accounts and brokers. When an investor files a complaint, FINRA reviews the complaint and, if appropriate, initiates an investigation into the matter.
While FINRA cannot resolve disputes between investors and brokers or award damages, it can take disciplinary action against brokers and brokerage firms that violate its rules. It can also refer serious violations to the SEC or other authorities for further action.
FINRA's Arbitration and Mediation Services
FINRA operates the largest securities dispute resolution forum in the United States. This forum provides a venue for investors to resolve disputes with their brokers or brokerage firms through arbitration or mediation.
Arbitration is a process in which a neutral third party, known as an arbitrator, hears a dispute and makes a decision. Mediation is a process in which a neutral third party, known as a mediator, helps the parties reach a voluntary settlement. Both processes are less formal and less expensive than litigation, and they can result in faster resolution of disputes.
Conclusion
FINRA plays a vital role in maintaining the integrity of the U.S. financial markets and protecting investors. Through its regulatory activities, enforcement actions, and investor protection programs, it works to ensure that the broker-dealer industry operates fairly and honestly.
While FINRA's rules and enforcement actions can deter misconduct and improve market integrity, it is also important for investors to take steps to protect themselves. This includes doing their own research, asking questions, and using the tools and resources that FINRA provides to make informed investment decisions.
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