FINRA: Protecting Investors and Regulating the U.S. Securities Industry

The Financial Industry Regulatory Authority (or FINRA) is a non-governmental organization that acts as a self-regulatory organization for securities firms that operate in the United States. The goal of FINRA is to protect investors by safeguarding the integrity of the financial marketsFinancial MarketsFinancial markets, from the name itself, are a type of marketplace that provides an avenue for the sale and purchase of assets such as bonds, stocks, foreign exchange, and derivatives. Often, they are called by different names, including "Wall Street" and "capital market," but all of them still mean one and the same thing..

Foundation of the Financial Industry Regulatory Authority

FINRA took the place of the National Association of Securities Dealers, Inc. (NASD)National Association of Securities Dealers (NASD)The National Association of Securities Dealers (NASD) was a regulatory body responsible for overseeing the securities industry. It was tasked with both the, which was founded in 1939, to monitor the conduct of securities firms that had to comply with SEC regulations. Many years later, the NASD launched a new computerized trading system and called it NASDAQ, which was later spun-off into a separate entity.

In 2007, the SEC approved the creation of FINRA as a self-regulatory organization through the merger of the NASD and the regulatory branch of the New York Stock Exchange.

Roles – FINRA

The Financial Industry Regulatory Authority works under the supervision of the Securities and Exchange Commission (SEC)Securities and Exchange Commission (SEC)The US Securities and Exchange Commission, or SEC, is an independent agency of the US federal government that is responsible for implementing federal securities laws and proposing securities rules. It is also in charge of maintaining the securities industry and stock and options exchanges and acts as the first line of oversight for the brokerage industry. More specifically, FINRA tries to make sure that:

• Those who sell securities have been tested, qualified, and licensed to guarantee a proper level of professionalism and ethical standards in the industry;
• Securities products are advertised properly and without information that could mislead investors;
• The investment products sold suit the needs of the investors they are sold to; and
• Investors understand the risks a specific security carries before purchasing it.

FINRA regulates the trading of securities, such as equities and corporate bonds and the most popular – derivatives.  The securities firms that are not regulated by other specific entities are generally regulated by FINRA.

As part of its regulatory duties, FINRA has several responsibilities. For example, to make sure that a certain level of professionalism and competence in the industry is maintained, FINRA:

• Periodically conducts regulatory exams of its regulated members;
• Licenses individuals and allows firms to enter the securities industry; and
• Provides educational services and qualification examinations to professionals in the securities industry.

Moreover, to make sure that proper ethical standards are followed and to protect investors from abuses by industry participants, FINRA:

• Defines specific rules to regulate the behavior of its members; and
• Takes disciplinary actions against the securities firms that don’t comply with securities laws or regulations issued by FINRA.

Key Departments

According to official reporting, the key departments at FINRA are the following:

• Member Regulation Department (Risk Oversight and Operational Regulation, and Sales Practice) – Monitors its members’ compliance with industry rules and regulations;
• Market Regulation Department – Conducts surveillance, examinations, and investigations of trading activity in U.S. equities, options, and fixed income markets;
• Enforcement Department – Investigates potential misbehavior and takes disciplinary action when necessary;
• Transparency Services Department – Focuses on over-the-counter (OTC)Over-the-Counter (OTC)Over-the-counter (OTC) is the trading of securities between two counter-parties executed outside of formal exchanges and without the supervision of an exchange regulator. OTC trading is done in over-the-counter markets (a decentralized place with no physical location), through dealer networks. securities and trading by maintaining databases and disseminating real-time and historical market information;
• Registration and Disclosure Department – Deals with registering and testing securities industry personnel;
• Dispute Resolution Department – Operates a dispute resolution forum for investors, brokerage firms, and their registered employees.

Other Regulatory Operations

FINRA’s other main regulatory operations include:

• The Office of General Counsel – Helps the entity with adopting and interpreting rules applicable to the brokerage industry;
• The Office of Fraud Detection and Market Intelligence – Reviews the allegations of fraud and investor harm and tries to detect insider trading across U.S. financial markets;
• The Office of Invest Education – Provides financial tools and educational resources to investors, including via the FINRA Investor Education Foundation;
• Advertising Regulation – Monitors advertising activity to ensure that investors are not misled;
• Corporate Financing – Tries to ensure that corporate offerings are not fraudulent and that underwriting compensation is fair.

Education and Licensing

One of FINRA’s goals is to educate investors and ensure a certain level of professionalism and competence in the brokerage industry.

That’s why every broker in the United States must be licensed by FINRA after passing specific exams and fulfilling certain ongoing-education requirements. To be registered, securities professionals must pass certain qualifying exams, which vary based on the specific role.

FINRA by the Numbers

According to official numbers provided on its website, in 2018, FINRA:

• Employs 3,585 people;
• Took 921 disciplinary actions for unethical behavior against its members;
• Charged fines for a total of $61 million;
• Ordered the restitution of $25.5 million to harmed investors;
• Referred over 900 fraud and insider trading cases to authorities such as the SEC; and
• Expects to report $822 million in operating revenues for 2019.

Additional Resources

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