What Is the Financial Industry Regulatory Authority (FINRA)?
The Financial Industry Regulatory Authority (FINRA) is an independent non-profit corporation that regulates the actions of securities firms in the United States.
In order to deal in securities in the United States, firms are required to become members of FINRA, unless they are regulated by another self-regulatory organization (SRO).
Why Is FINRA Important?
This self-regulatory body helps to protect investors and preserve market integrity by establishing, overseeing, and enforcing rules that govern brokers and dealers.
How Does FINRA Work?
FINRA aims to “protect the investing public against fraud and bad practices” such as insider trading, account churning (excessive transactions to increase fees), predatory lending, and so on. Here are 6 ways that FINRA works:
1. Establishing Rules
2. Monitoring Compliance
Beyond establishing the rules, FINRA monitors its members and conducts regulatory exams to ensure that they are in compliance. It also offers compliance tools that help firms meet these regulatory requirements.
3. Promoting Transparency
FINRA publishes trade data (e.g. total shares, total shares, average trade size) and has strict reporting requirements for its members. It also offers reporting tools that are designed to facilitate transparency in applicable markets and ensures that its members’ advertisements, websites, and other forms of media related to securities are presented truthfully and clearly.
4. Publishing Resources
FINRA offers a variety of resources and tools for investor education, along with training events, e-learning courses, continuing education programs, and more.
5. Issuing Licenses
In order to deal in securities in the United States, firms must become a FINRA-registered broker-dealer (unless they are regulated by another SRO). These memberships are only granted to firms who meet certain standards and requirements.
FINRA also requires securities professionals to pass a number of exams to demonstrate competency in their field. These exams cover a wide range of subjects and – if passed – provide qualifications that allow the individuals to operate in those fields. Some licenses issued by FINRA include:
Series 3: Allows the sale of commodity futures contracts
Series 6: Allows the sale of packaged investment products such as ETFs and mutual funds
Series 7: Allows the sale of nearly any type of individual security such as stocks and bonds
6. Disciplinary Action
FINRA has the power to fine, suspend, and ban members who violate its rules or federal securities regulations. In 2018 alone, FINRA:
Brought over 900 disciplinary actions against FINRA members
Issued $61 million in fines
Ordered FINRA members to repay $25.5 million to harmed investors.
Referred over 900 cases of fraud and insider trading to the SEC and other regulatory agencies
Can FINRA Send You to Jail?
FINRA is not a government organization, so it does not have the power to send people to jail (even if they violate FINRA's terms). That said, it does have the power to refer cases to the SEC and other government agencies that do have the power to send people to jail.
How Do You Become a FINRA Member?
In order to become a FINRA member, you'll need to:
Reserve your firm’s name
Complete an application form
Pay application fees
Electronically submit your broker-dealer form
Submit a signed and notarized hard copy of your broker-dealer form
Submit all required forms through FINRA's online compliance platform
For more details, visit FINRA's registration page.
The History of FINRA
In 2007, FINRA was approved by the Securities and Exchange Commission (SEC) and was formed through the merging of the National Association of Securities Dealers (NASD) and the regulatory divisions of the New York Stock Exchange (NYSE).
As of 2019, it had more than 3,600 employees in 16 offices throughout the United States and monitored 3,700 brokerage firms, 155,000 branches, and over 634,000 registered securities representatives.
Explore the following links for more information on other regulatory authorities in the United States: