FINRA: The organization that regulates broker-dealers and protects investors
- The Financial Industry Regulatory Authority (
FINRA) oversees US-based broker-dealer firms, registered brokers, and market dealings.
- Brokers must be registered with FINRA in order to trade securities with the public.
- FINRA plays a big role in market security by watching for manipulation or fraud.
Financial Industry Regulatory Authority (FINRA) is a private organization authorized by the US government to enforce ethical investment practices among registered brokers. FINRA is largely known for regulation and registration of brokers and brokerage firms.
In reality, FINRA casts a much wider net of responsibility. The organization also monitors daily market functions, handles customer complaints, and maintains a library of educational materials for investors.
"Our whole mission is investor protection and market integrity," says Gerri Walsh, senior vice president of Investor Education at FINRA.
Learn more about how FINRA protects everyday investors, maintains market integrity, and why its job is so important.
What is FINRA?
FINRA is a self-regulatory organization (SRO) that oversees broker-dealer firms, registered brokers, and market dealings in the US.
Empowered by the Securities and Exchange Commission (SEC), FINRA writes rules that brokers must abide by, evaluates firms' compliance with those rules, and disciplines brokers that fail to adhere. In order to trade securities with the public, brokers must be registered with FINRA, which administers a rigorous application and examination process. FINRA's online BrokerCheck tool shows whether a broker is registered with the organization.
FINRA exists to help the SEC regulate aspects of the securities business, namely brokers and their relationships with consumers.
Quick tip: Check whether your broker or brokerage firm has been following the rules with FINRA's BrokerCheck tool.
FINRA's services can be divided into a few different, but connected, duties.
- Regulate and oversee brokers. Once registered with FINRA, brokers must complete ongoing education requirements over the years. Brokers are subject to periodic audits, which checks whether a firm and its employees are conducting competent and honest business. If a broker is found to be noncompliant, FINRA can bring disciplinary actions against the individual and/or the firm.
- Maintain its BrokerCheck database on brokers and firms. You can use FINRA's BrokerCheck tool to check whether a broker is registered. BrokerCheck also provides background information on a broker or firm, including any history of disciplinary action.
- Receive and address customer complaints. When you have an issue with your broker or brokerage firm, you can turn to FINRA to file a complaint, which FINRA will then investigate.
- Provide dispute resolution services. When customer complaints evolve into legal action, FINRA provides a forum and lawyers for arbitration and mediation between customers and brokers as an alternative to going to court.
- Offer resources and tools for investors. FINRA has a wealth of personal
financeand investing articles and calculators available to beginner and advanced investors alike. It even offers free online investing courses. You can give FINRA a toll-free call, to get help in understanding your investments whether you don't understand something in your statements or you want to know more about a hard sell your broker is trying to make. There's even a specialty helpline for senior citizens.
- Surveille equity markets. FINRA's technology department plays a strong role in maintaining market integrity by monitoring market transactions and orders every day. Through algorithms and artificial intelligence, FINRA looks for any patterns or signs of market manipulation or fraud. If anything is found, it gets flagged to FINRA's enforcement team, or sent to other relevant parties like the SEC or the securities exchange itself.
Quick tip: Bringing your complaint about a broker to arbitration or mediation can be a more cost-effective method than going to court. While there is a fee for the service, FINRA will provide you with a choice of arbitrators and walk you through the process.
With such a wide responsibility, FINRA is split into 11 departments, including:
- Board and External Relations includes Investor Education, Government Affairs, and Communications departments.
- Enforcement takes care of FINRA'S disciplinary actions against brokers.
- Legal oversees FINRA's rulemaking and corporate legal functions, and includes Corporate Financing and Dispute Resolution departments.
- Member Supervision watches over and examines member firms.
- Market Regulation Transparency Services works with the SEC and exchanges to surveille markets and examine firms to identify any potential market manipulation or fraud. This department also checks that firms remain compliant to federal securities laws.
- Office of Hearing Officers provides impartial adjudicators to preside over the disciplinary actions brought forward by the Enforcement Department.
- Technology touches all aspects of technology at FINRA, including the algorithms that surveille markets.
History of FINRA
- 1934: In response to the stock market crash of 1929, the Securities Exchange Act of 1934 established the SEC to protect against another such crisis.
- 1938: The National Association of Securities Dealers, Inc. (NASD) is created under the Maloney Act amendments to the Securities Exchange Act of 1934 as a private regulatory body.
- 2007: The SEC approves the NYSE and NASD merger, creating a new agency, FINRA.
FINRA vs. SEC
|Type||Private self-regulatory organization||Government agency|
|Main Focus||Regulation of brokerage firms and brokers||Regulate individual securities & markets|
|Other Duties||Administer examinations and registration to brokers and brokerage firms||Take legal action against violations of securities laws|
|Public Protection||Field and address customer complaintsProvide arbitration forum||Ensures accuracy of information regarding publicly available securities|
Due to the magnitude of the securities trading industry, the SEC delegated the regulation of brokers to FINRA as a matter of efficiency. By outsourcing one side of the business, the SEC can maintain better oversight.
One way to see it is that FINRA primarily deals with the human aspect of investing, focusing on the way brokers do business with the public. It ensures that brokers are up to code with its registration process and audits, and assists the public by receiving complaints and offering an arbitration forum.
Meanwhile, the SEC focuses on the bigger picture. The SEC is able to regulate and keep an eye on securities. The SEC also verifies that companies are providing accurate and total information on their publicly available securities, whether on exchanges or over-the-counter. If someone is found in violation of securities laws, the SEC can bring action against them in federal court.
Still, FINRA and the SEC work together in examining broker practices, sharing market surveillance information, and teaming up on enforcement actions.
The financial takeaway
While it may seem like a background player compared to big name and trendy brokerage firms, FINRA should be investors main resource when it comes to securities and investment safety.
FINRA is a great and important resource for anyone who participates in securities markets. It provides a ton of resources, including BrokerCheck, to help investors make smart investment decisions. It also puts brokers and firms through a rigorous registration process to ensure only qualified entities are interacting with the public when it comes to securities.
FINRA can even serve as your personal secondary gut check with its toll-free helpline whenever you need help understanding the investment world.
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