What is FINRA?

Sometimes regulatory power goes beyond government agencies. That’s where self-regulatory organizations (SROs), such as the Financial Industry Regulatory Authority (FINRA), come in. This organization oversees brokers and firms in the stock and bond market

Learn more about FINRA and the role it plays in the American financial system. 

Key takeaways

  • FINRA was created to help protect American investors from fraud and bad trading practices.
  • In the U.S., brokers and firms must be registered with FINRA to trade on behalf of their clients. 
  • The Securities and Exchange Commission (SEC) is a government organization that oversees FINRA.

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FINRA basics: its meaning and history

The Financial Industry Regulatory Authority (FINRA) is a not-for-profit organization created to help protect investors and maintain the integrity of the U.S. securities market. 

While the SEC regulates the broader financial market, FINRA oversees U.S. broker-dealers, capital acquisition brokers and funding portals. Unlike the SEC, FINRA isn’t a government agency. But it does have some enforcement power and plays a key role in helping the securities market run fairly and honestly. 

What does FINRA do?

FINRA strives to protect investors and safeguard market integrity by:

Writing and enforcing FINRA compliance rules

FINRA writes and enforces rules that U.S. broker-dealers and firms must follow. The organization regulates trading practices for corporate bonds, equities and securities futures.

FINRA requires its members to meet certain compliance standards:

  • U.S. brokers and firms must be registered with FINRA to trade on behalf of the investing public.
  • Securities professionals have to pass the qualifying exams administered by FINRA.
  • Financial institutions must retain specific electronic communications, prevent data theft and loss, make information accessible and follow data storage procedures. 
  • FINRA members must abide by the organization’s conduct standards. 

Investigating misconduct

FINRA oversees approximately 3,390 registered brokerage firms and 612,450 registered brokers. The organization uses data-gathering technology to monitor the daily activities of these professionals and investigate possible securities violations—like insider trading and fraud.

FINRA has the power to levy fines and sanctions against brokers and firms that violate its regulations. In some cases, FINRA can suspend or prohibit violators from working in the securities market. The organization may refer certain cases to the SEC or other government organizations for prosecution. 

Protecting investors

Investors can use FINRA’s BrokerCheck database to research brokers, financial advisers and investment advisers. The database includes information about a member’s educational background, certifications and whether any disciplinary actions have been taken against them. 

FINRA also has free educational resources—like the FINRA Investor Education Foundation—to help consumers learn about investing and fraud prevention. 

Educating brokers

U.S. securities professionals must pass FINRA’s qualifications exams. FINRA also requires licensed brokers to complete continuing education requirements. 

Resolving conflicts

The FINRA dispute resolution forum offers mediation and arbitration services for investors, brokers and firms. Some parties may use these services to settle disputes instead of going through the court system.

FINRA benefits and limitations

FINRA plays an important role in protecting investors and ensuring fair and effective market activity. But the organization has faced criticism.  

How FINRA benefits investors

FINRA provides investor protections, including:

  • Comprehensive industry oversight: FINRA monitors the daily activity of brokers and firms to help ensure market integrity. 
  • Consumer education: The BrokerCheck database lets consumers vet brokers and firms. FINRA also provides free educational resources that cover investing basics, fraud prevention and more.
  • Disciplinary action: If brokers or firms violate FINRA rules, the investing public can file complaints. The organization investigates these complaints and can take disciplinary action if necessary. FINRA also provides investors and brokers with dispute resolution services. 

Criticisms of FINRA

However, FINRA does have limitations:

  • Limited protections: According to some critics, FINRA could do more to protect investors. For example, FINRA has faced criticism for its handling of repeat offenders. 
  • Organizational structure: Since FINRA isn’t a government agency, its enforcement capabilities may be limited. Some policymakers have also stated that the organization needs more oversight. 

FINRA vs. SEC: What’s the difference?

The SEC is the government agency that regulates the financial market, and FINRA is an SRO that oversees brokers and firms within that market. While both organizations play key roles in protecting investors and ensuring market integrity, there are several differences between the two.

  FINRA SEC
History The National Association of Securities Dealers (NASD) and the member regulation, enforcement and arbitration operations of the New York Stock Exchange (NYSE) combined to form FINRA in 2007. Following the stock market crash of 1929, the SEC was formed by the Securities Exchange Act of 1934 (SEA).
Organization type Nongovernmental organization Government agency
Mission Regulate brokers and firms to help protect investors and ensure market integrity. Create honest and fair markets that ensure corporate transparency and protect investors.
Duties
  • Write and enforce rules for brokers and firms
  • Manage licensing and training requirements
  • Provide educational resources for investors
  • Take disciplinary action against violators
  • Enforce federal securities laws
  • Provide investor education
  • Oversee FINRA and its programs
  • Bring civil action against lawbreakers

 

FINRA in a nutshell

FINRA was created to help protect investors and promote market integrity. U.S. brokers and firms must register with this SRO before they conduct trades. 

Even though FINRA isn’t a government organization, it’s able to levy fines and take disciplinary actions against those who break its rules. It also provides arbitration and mediation services, offers investor education tools and more.

Want to learn more about investing? Check out the basics of stocks and bonds.

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