What is FINRA? Understanding the organization & its purpose

FINRA stands for the Financial Industry Regulatory Authority (FINRA). It’s a national, self-regulatory organization that oversees brokers and firms in the stock and bond markets. 

What you’ll learn: 

• FINRA is a private, nongovernmental organization created to help protect American investors from fraud and bad trading practices.

• In the U.S., broker-dealer firms must be registered with FINRA to trade on behalf of their clients. 

• The U.S. Securities and Exchange Commission (SEC) is a governmental organization that oversees FINRA.

According to FINRA, its mission is “to protect investors and safeguard the integrity of our vibrant capital markets to ensure that everyone can invest with confidence.” The organization is charged with supervising its member broker-dealer firms according to federal law. 

Here are some of FINRA’s key activities.

FINRA writes and enforces rules that its member firms must follow. The organization regulates trading practices for corporate bonds, equities and securities futures.

FINRA requires its members to meet certain compliance standards. For example, they’re required to:

• Register with FINRA to trade on behalf of the investing public

• Pass the qualifying exams administered by FINRA

• Retain specific electronic communications, prevent data theft and loss, make information accessible and follow data storage procedures 

• Abide by the organization’s conduct standards

FINRA oversees more than 3,250 registered brokerage firms and 625,000 registered brokers. The organization uses data-gathering technology to monitor the daily activities of these professionals and investigate possible securities violations such as insider trading and fraud.

FINRA has the power to levy fines and sanctions against member 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 governmental organizations for prosecution.

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 disciplinary actions that have been taken against them. 

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

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

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.

In the U.S., securities are traditionally traded through regional stock exchanges that enforce rules for their members. The New York Stock Exchange (NYSE) is a well-known example. After the stock market crash of 1929 and the Great Depression, the Congress established the SEC to protect the investing public. The SEC didn’t replace self-governing bodies like the NYSE, but it did require the exchanges to register with the SEC and comply with its oversight.

In response to evolving investment practices, the National Association of Securities Dealers (NASD) was formed in 1939. Under the supervision of the SEC, the NASD played a regulatory role and required its members to maintain high standards in conduct and practices. The organization would eventually become today’s FINRA.

FINRA plays an important role in protecting investors and ensuring fair and effective market activity. But while investors may benefit from its oversight, it may help to know that there are criticisms related to the organization’s self-regulatory nature.

FINRA provides investor protections, including:

• Comprehensive industry oversight: FINRA monitors the daily activity of member firms to help ensure market integrity. 

• Consumer education: The BrokerCheck database lets consumers research the professional history and experience of FINRA’s member firms. FINRA also provides free educational resources that cover investing basics, fraud prevention and more.

• Disciplinary action: If member firms violate FINRA rules, the investing public can file complaints. FINRA then investigates these complaints and can take disciplinary action if necessary. FINRA also provides investors and brokers with dispute resolution services.

While FINRA can offer benefits, it can also 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 U.S. policymakers have also stated that the organization needs more oversight.

Both organizations play key roles in protecting investors and ensuring market integrity, but there are several differences between the two.

FINRA oversees U.S. broker-dealers, capital acquisition brokers and funding portals. The SEC regulates the broader financial market. It additionally oversees FINRA. 

Unlike the SEC, FINRA isn’t a government agency. But it does have some enforcement power and plays an oversight role in helping the securities market run fairly and honestly.

FINRA is a self-regulatory organization created to help protect investors and promote market integrity. Its members are required to register with FINRA before they conduct trades. 

Even though FINRA isn’t a governmental organization, it can levy fines and take disciplinary actions against members that 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.