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- The Financial Industry Regulatory Authority (FINRA) oversees U.S.-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.
The Financial Industry Regulatory Authority (FINRA) is a non-profit, self-regulatory organization (SRO) authorized by the U.S. government to oversee broker-dealer investment firms, registered brokers, and market dealings in the U.S.
In addition to registering brokers/broker-dealers, FINRA’s wide net of responsibility includes monitoring daily market functions, handling investor complaints, and maintaining 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.
FINRA’s key functions
FINRA has regulatory responsibilities granted by the Securities and Exchange Commission (SEC) to oversee primarily brokers and broker-dealers, which includes organizations and individuals who trade securities either for their own accounts or on behalf of clients, such as online brokerages.
Yet not all financial organizations and financial professionals involved with investing have to register with FINRA, as broker-dealers are separate from registered investment advisors (RIAs). Unlike broker-dealers, who can accept commissions for their investment advice, RIAs can only accept fees directly from clients, and they are primarily regulated by the SEC.
Still, FINRA has many key functions that span both public and private markets for stocks, bonds, and other securities. Private markets are generally less regulated, but FINRA still registers some brokers who sell private market securities to institutional investors, for example.
In general, FINRA’s responsibilities include the following:
Registration
Registering broker-dealers, along with capital acquisition brokers, funding portals, and individual representatives of these firms, serves to hold these registrants accountable and provides the public with a database to help ensure they’re working with legitimate organizations or individuals.
FINRA also maintains its BrokerCheck database, which you can use to check whether a broker is registered. BrokerCheck also provides background information on a broker or firm, including any history of disciplinary action.
Rulemaking
FINRA’s rulemaking responsibilities include writing and enforcing rules for registrants to follow such as regarding their conduct with clients, how they manage their operations, and how they engage in transactions.
Examinations
To register with FINRA, applicants have to pass an exam. Once registered with FINRA, brokers must also complete ongoing education requirements over the years.
Enforcement
Brokers are subject to periodic audits, which check whether a firm and its employees are conducting competent and honest business. If a broker is found to be non-compliant, FINRA can bring disciplinary actions against the individual and/or the firm.
Relatedly, FINRA receives and addresses 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.
Dispute resolution
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.
Investor education
FINRA has a wealth of personal finance and investing resources 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, such as if you can’t figure out what something in your broker statements means 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.
Market surveillance
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.
FINRA’s impact on financial markets
FINRA has an important role to play in protecting investors and contributing overall to the smooth running of financial markets. In particular, FINRA helps with:
Market integrity
FINRA’s regulatory and enforcement responsibilities help ensure that brokers act with integrity, and when they don’t, they’re penalized.
Investor confidence
Connected to market integrity, FINRA’s oversight helps protect investors and gives them more confidence to participate in financial markets.
“Investing is an important part of people’s hard-earned money,” said Harris Kay, a managing partner with Murphy & McGonigle, a law firm specializing in securities law. “They deserve to be in a place that follows the rules.”
Quick tip: Check whether your broker or brokerage firm has faced any disciplinary action by using FINRA’s BrokerCheck tool.
Industry standards
FINRA’s rules also provide clarity to the brokerage industry in terms of the standards expected for ethical behavior and professional conduct. That can also contribute to investor confidence while helping brokerage firms get on a level playing field.
History of FINRA
FINRA’s history has its roots in the Great Depression. A brief timeline includes the following:
- 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 NASD and NYSE Member Regulation merger, creating a new agency, FINRA.
FINRA vs. SEC
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 more on the bigger picture. The SEC is able to regulate and keep an eye on securities, investment advisors, and overall try to ensure fair investment markets. 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.
FINRA, summarized
At first glance, FINRA might seem like it’s only something experienced investors or finance fanatics should care about, but in reality, FINRA can be a primary resource for investors when it comes to securities and investment safety.
In particular, anyone who is considering working with a broker should also consider looking them up through FINRA’s BrokerCheck tool, and you should also consider reviewing FINRA’s investor education resources. Plus, knowing that FINRA puts brokers and brokerage firms through a rigorous registration process to ensure only qualified entities are interacting with the public when it comes to trading securities can help support investor confidence and healthy markets.
FINRA can even serve as your personal secondary gut check with its toll-free helpline whenever you need help understanding the investment world.
FAQs about FINRA
No, FINRA is a self-regulatory organization run by a non-profit, but it is authorized by Congress, with supervision from the SEC.
Most of FINRA’s funding comes through membership fees paid by brokers, but it can also receive funding through other means like collecting fines from members who break the rules
If you have a complaint against your broker, file a complaint with FINRA who will review your case and issue disciplinary action if the complaint is deemed valid.