Last updated: 13 Aug, 2021 | 12:10 pm
What is FINRA?
FINRA is a not-for-profit, self-regulating organization, overseeing more than 4200 brokerage firms and 630,000+ brokers. The abbreviation FINRA stands for Financial Industry Regulatory Authority. It is not a government regulatory body, though it works under the auspices of the US Securities Exchange Commission. It aims to ensure that the financial markets across the US are functioning well with no hitches and managing risk appropriately to protect investors’ interests. It is empowered by Congress to make the market a safe space for everyone to participate.
A Brief History of FINRA
The Financial Industry Regulatory Authority was originally called the National Association of Securities Dealers, Inc. (NASD). The roots can be traced back to 1939 when NASD was first formed. After the Great Depression, monitoring the way stakeholders used the stock exchanges became necessary. When FINRA succeeded NASD in 2007, it also absorbed the member regulation, arbitration and regulation-enforcement arms of the New York Stock Exchange (NYSE).
The predecessor NASD launched the NASDAQ (National Association of Securities Dealers Automated Quotations) in 1971, leading to duplication of the member rulebooks and enforcement systems. In 1998, NASDAQ merged with AMEX. Over time, a decision was taken to combine the NYSE regulation operations and the NASD’s oversight of brokers and dealers.
FINRA now makes its revenues by providing various services, levying fines and charging membership fees. Currently, it has more than 3000 employees and has head offices in New York and Washington city along with 20 regional offices.
FINRA as a Self-Regulatory Organization (SRO)
FINRA regulates trading in the securities market for equity instruments, both listed and unlisted, bonds, government securities, asset-backed instruments like futures and options, and other fixed-income instruments. It has many statutory responsibilities like oversight of broking firms and market regulation. It also has contractual obligations for different stock exchanges.
The statutory responsibilities of this SRO include examining securities firms, carrying out continuous surveillance of markets, reviewing allegations of fraud and taking disciplinary actions against firms and registered representatives who break rules and indulge in unethical behavior. Let’s take a more extensive look at what FINRA does.
FINRA examines firms based on the scale of their operations and how much risk exposure they have. It ensures that firms comply with the Securities Law, FINRA rules, etc. on paper and cross-verifies against the data gathered across exchanges and alternative trading systems. If it detects market manipulation, rule violation, or any possibility of fraud, it is authorized to carry out an expedited investigation.
FINRA can bring disciplinary action on errant firms and if necessary even bar such brokers and firms. It can direct firms to take necessary action to protect the interest of investors.
To get an idea of the scope of its regulatory activities, some statistics from 2019 can help. In that year, the SRO suspended 415 brokers, barred 348 of them and expelled 6 broking firms. It also charged fine payments of $39.5 million and demanded that the guilty brokers pay $27.9 million to troubled investors in restitution.
Other Functions of FINRA
The Regulatory functions of the financial industry regulatory authority are not the end of what it does. One important responsibility of FINRA is investor education- ensuring that people have access to all the information necessary for maintaining transparency in the capital markets. It runs FINRA Investor Education Foundation to that end.
It provides a bunch of tools to disseminate real-time data and historical information for effective trading. One is Trade Reporting and Compliance Engine (TRACE) for over-the-counter transactions in fixed income securities. Another is FINRA Gateway for easier compliance and reporting. The most famous tool is BrokerCheck that hosts data about whether brokers are authorized to sell securities and offer financial advice, along with their employment history, disciplinary actions, etc.
FINRA also provides registration and continuing education services to securities professionals. It conducts many examinations necessary to become a certified securities trader. The SRO conducted 6470 exams in 2019. The credentials are recognized nationally.
It provides technological services to broking firms, stock exchanges, other SROs, SEC and the public. FINRA oversees the Central Registration Depository program, which involves fulfilling the license filing and registration requirements of the financial industry and other regulators. It also offers the Financial Professional Gateway (FinPro) tool to help firms self-manage registration requirements.
One of the most important functions of FINRA is to mediate conflicts and monetary/business disputes and provide arbitration services to firms, individual brokers, and dealers. Many exchanges have contracted FINRA to develop standard procedures and one single forum to resolve security-related problems. People aspiring for careers in the same can also find resources at FINRA.
When it comes to ensuring that fair advertising practices are being followed, FINRA is the body to go to. FINRA helps ensure that communication materials for the general public are not misleading. Additionally, it also ensures fairness in corporate financing with a responsibility towards ensuring fair underwriting compensation.
You should ensure that you are familiar with the way the capital markets work and the stocks you choose are fundamentally sound. Always choose only those brokers who are registered with FINRA.
FINRA is one of many regulatory bodies that play a key role in ensuring that brokers disclose all relevant information to investors before they purchase any security. In combination with the SEC, and SIPC, there are many safeguards in place to keep the financial markets working fairly. Therefore, you need not worry when you want to trade in US shares and other securities. It's safe to invest in the US stock market.