FINRA is the largest self-regulatory organisation (SRO) in the US. In fact, it hands out licenses and enforces day trading rules and regulations at over 4,500 brokerage firms. This page will detail everything you need to know about FINRA, including its history, definitions, violations, disciplinary actions, and complaints. Finally, the page will conclude with guidelines on how to go conduct a BrokerCheck of member firms.
What is FINRA?
Firstly, what does it stand for? It stands for the Financial Industry Regulatory Authority. The body is a gateway all securities firms must pass to conduct business in the US. The FINRA is a non-governmental organisation.
FINRA implements regulations to protect investors and to ensure the markets function honestly. To do that, it enforces compliance with marketing and margin rules, pattern day trader requirements and more. See below for full details of powers and regulations.
FINRA is responsible for certain duties, including membership registration, certification and arbitration. However, the overarching regulator of the securities markets, including FINRA, is the SEC.
Purpose
FINRA’s primary aim is to protect investors.
To do that, it aims to make sure the US securities industry operates fairly and transparently. This objective affords the regulatory body a broad remit. In fact, they have governance over thousands of smaller tasks to achieve their aim.
These tasks can range from the investigation of new issues, such as the blockchain cryptocurrency Bitcoin, to enforcing advertising and trade reporting rules.
History
FINRA came to life on July the 26th, 2007, following the merger of the New York Stock Exchange’s regulatory committee and the National Association of Securities Dealers. This laid the foundation for a far-reaching body, responsible for regulating dealings between dealers, brokers and public investors. The idea was also to remove regulatory overlap and cut costs while retaining the same values.
The body was originally known as the Securities Industry Regulatory Authority (SIRA). However, a name change soon came about because of the similarities with the Arabic term ‘Sirah’, which are texts about the life of Muhammad.
Structure
By-laws dictate a board of governors must run FINRA. In fact, the board must be formed of:
- The CEO of FINRA
- The CEO of NYSE Regulation
- 11 Public Governors
- 10 Industry Governors
The regulatory body has over 3,400 employees with headquarters in Washington DC and New York. In addition, there are 14 other regional and district offices across numerous locations, including Chicago.
Head over to the official website to find the address of your closest branch.
Essentially, those 3,400 employees provide regulatory oversight on all securities firms doing business with the public.
In addition, their regulations cover those companies offering:
- Testing
- Mediation
- Arbitration
- Professional training
- Licensing of registered persons
Finally, their reach extends to market regulation by contract for the New York Stock Exchange, the NASDAQ Stock Market, Inc., the American Stock Exchange LLC, and the International Securities Exchange, LLC.
This includes governance of industry utilities, such as Trade Reporting Facilities (TRF) and over-the-counter (OTC) operations.
FINRA primarily receives funding through state registration and filing/listing fees, annual member fees, plus the fines that it levies.
Note there is also an independent FINRA ombudsman office who can help you informally resolve issues with the regulatory agency.
See the help desk on their official website for contact details and upcoming holidays.
Powers & Responsibilities
Regulatory Action
FINRA has a number of powers and responsibilities.
Any firm dealing in equities, bonds, securities futures and options, must reach a membership agreement with the FINRA if they don’t have regulatory oversight from another SRO.
A brokers entitlement to a license can be revoked by the agency at any point.
In fact, the body has almost absolute power over the renewal of licenses, expiration and disqualification. It can request audits, launch an inquiry, require an expert witness testimony and trace historical data.
Having said that, the manual dictates that FINRA usually starts with a letter of caution before resorting to severe actions, such as disqualification. To begin with, they’re likely to offer guidance on knowing your customer and safeguarding their interests.
Key Rules & Regulations
- Best execution rule – The best execution rule promises significant investor protection. It requires a broker-dealer to execute a customer’s order in a manner that offers the consumer the most benefit.
- Sustainability rule – The 2111 Suitability rule promises similar protection. It requires broker-dealers to complete private securities transactions only suitable for the particular individual following proper due diligence.
- Pay to play rule – The rule seeks to regulate actions of FINRA-listed members who partake in activities to compensate from government institutions, on the part of investment advisors.
- Taping rule – This prevents companies hiring too many employees from previously barred brokers.
- Outside business activity rule – This requires the disclosure of private securities transactions to prevent conflicts of interest.
Overall then, becoming a member firm and remaining a member firm isn’t as straightforward as many believe.
In particular, if you meet the definition of an ‘institutional investor’, you will have to adhere to strict regulations.
Qualifications & Exams
FINRA also provides qualifications and exams to industry workers, such as the operations professional exam. See the official website for a calendar of when you can expect the disclosure of extensive educational information and FINRA securities exam requirements. There you will also find guidance on their Continuing Education (CE) online regulatory element.
In addition, the body offers useful resources to investors, such as their Fund Analyzer, which provides data on over 18,000 funds, including breakpoints.
Arbitration
FINRA isn’t just concerned with the heightened supervision of brokers, insider trading and daily broker lists. They also facilitate the largest securities dispute resolution service in the US.
They offer effective arbitration and mediation processes. This helps businesses, brokers and individuals resolve disputes without judicial action. Most importantly, these processes offer a relatively quick and inexpensive means of resolving issues.
So when you’re filing a FINRA complaint, one of the above dispute resolution services may be the recommended course of action.
You can contact the Office of Dispute Resolution by email or their phone number, which you can look up on their website. There you will also find details on arbitration awards and the code of arbitration.
Additional Resources
There are also a number of useful tools outside their normal business activity.
For example, the Required Minimum Distribution (RMD) calculator helps you establish how much to withdraw from a traditional 401(k) or IRA.
FINRA also offers a free filing fee calculator. Not to mention their Investor Education Foundation can help you with everything from designations to advisor checks.
It’s also worth noting that the Office of the Whistleblower offers financial incentives for information that lead to big fines.
On top of that, the agency also sells outsourced regulatory products and services to stock markets and certain exchanges, including the International Securities Exchange (ISE) and the American Stock Exchange (AMEX).
Note you can find the meaning and details of all regulations on their official website. You can also get a snapshot of what they’re doing in terms of cybersecurity.
FINRA Criticisms
FINRA is quick to praise their enforcement actions in press releases. However, lawyers from Washington DC-based firm, Sutherland Asbill & Brennan LLP, found there has been a steady decline in supersized fines (in excess of $1 million).
For example, in 2005, FINRA took 35 fines. However, by 2006 that number had dropped to 19. The total amount of fines steadily declined in the late 2000s. This led the written report to conclude that the “data suggest that securities regulators may have retrenched their efforts to regulate through the use of novel theories”. Fortunately, figures began to creep up in 2011, as the agency collected $71.9 million vs the £42.2 million in 2010.
Despite enhancements in the technology at their disposal and improvements in the investigation process, recent years have seen another slump in fines.
For example, in the first half of 2017, FINRA gave out $23.4 million in fines.
Yet in the first half of 2016, they had given out over three times the amount, at $79.4 million.
There are other criticisms too.
Many believe there is inadequate oversight from the SEC.
In addition, industry commentators believe it isn’t fair that the body acts like a government agency but does not have to follow the same rules and laws.
For example, FINRA is not subject to the Freedom of Information Act.
Recent FINRA Performance
FINRA does more than collate data and run background checks on investment advisors.
It also oversees regulatory exams of licensed institutions.
For example, in 2015 the body released their annual Regulatory and Examinations Priorities Letter.
This has significant influence over broker-dealers and affiliated banks and insurance companies.
Concerns about variable annuities and certain sales practices were brought up in the letter.
However, in the 2016 letter, it became apparent more work was still to be done.
In particular, there were worries around interest-rate sensitive products, following an increase in interest rates.
Disciplinary Actions
You can see their monthly and quarterly disciplinary reviews for the most recent enforcement actions.
For example, in 2017, 1,400 disciplinary actions were taken by the regulatory agency while over 500 brokers were barred.
Early 2018 saw a number of fines given out for misleading customers and unsuitable use of customer funds.