posted on 07-11-2020

Financial Industry Regulatory Authority (FINRA)

Updated July 11, 2020

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

Securities firms must follow FINRA rules and regulations which govern activities such as transactions, equity trades, reporting, loans, communication, and more.

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:

  1. Reserve your firm’s name
  2. Complete an application form
  3. Pay application fees
  4. Electronically submit your broker-dealer form
  5. Submit a signed and notarized hard copy of your broker-dealer form
  6. Submit all required forms through FINRA's online compliance platform
  7. Submit fingerprints 

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.

Further Reading

Explore the following links for more information on other regulatory authorities in the United States:

Ask An Expert

What Is the Difference Between FINRA and the SEC?

FINRA is a non-government organization that only regulates member firms. The SEC is a government organization that oversees all investment-related activities, including FINRA. 

Simply put, FINRA is in charge of regulating firms that deal in securities, while the SEC is more interested in the activities of individual investors.

Can FINRA Issue Fines?

Yes. FINRA is in charge of creating and enforcing rules and can issue fines if a firm does not comply.

How Is FINRA Funded?

FINRA is funded through annual fees from members, fines brought against members, and other industry fees.

Are FINRA Exams Difficult?

With a number of different qualifications available, the difficulty varies depending on the exam. That said, the Series 7 is one the most common exams (and one of the two that must be passed in order to buy and sell securities). It tests knowledge on the responsibilities and  functions of stockbrokers while assessing an applicant’s ability to perform the duties of a general securities representative.

The exam covers four subject areas: customer acquisition, customer evaluation, information processing and disclosure, and transaction processing. Though FINRA doesn’t usually publish statistics about the exam, at the 2019 annual conference, it announced that over 10,500 candidates sat for the Series 7 between October 1st, 2018 and March 31st, 2019. Of those candidates, only 71% passed both the Series 7 and SIE.