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What Is the Financial Industry Regulatory Authority (FINRA)?

UTC by John Caroline · 6 min read
What Is the Financial Industry Regulatory Authority (FINRA)?
Photo: Shutterstock

The need for regulatory bodies in the financial world cannot be underestimated if the interest of investors should be protected. Here is a guide to understand what FINRA, a private financial regulatory body, is all about.

In order to maintain reasonable ethical standards in any sector in society, the government of every nation either sets up regulatory bodies or authorizes already established regulatory bodies to control the affairs of these sectors. Financial Industry Regulatory Authority (FINRA) is a private regulatory body, authorized by the governmental body to oversee and regulate the affairs of the American financial system.

The Securities and Exchange Commission (SEC), the ultimate US government regulatory agency, supports and empowers FINRA.

SEC has charged FINRA with the primary assignment of focusing on setting standards and enforcing rules on brokers and broker-dealer firms in America. The industry basically acts as an auditor which scrutinizes the performances of brokers within the United States.

Manipulative operations and bad practices have become rampant in the financial sector as the rate of fraudsters who seek to dupe people of their wealth is continuously on a significant rise in recent years.

The existence of a self-regulatory institution like FINRA curtails such bad practices and protects the interests of investors in the market. FINRA is the largest self-regulatory firm in the United States by the volume of the brokerage firms and registered securities representatives it oversees. It was more than 3,700 and 63,000 respectively as of mid-2021.

History of FINRA

The evolution of FINRA began in mid-2007. At that time, FINRA came as a merger between the National Association of Securities Dealers, Inc. (NASD)  and the New York Stock Exchange (NYSE).

NASD was a private regulatory body established under the 1938 Maloney Act amendments to the Securities Exchange Act of 1934. It was as well empowered by the SEC and responsible for overseeing and monitoring the activities of its members.

FINRA has become a successor to NASD, as such both entities are established with similar regulatory powers.

FINRA’s Activity

As said earlier, the essence of regulatory bodies in the financial market cannot be overemphasized. They serve the market a lot of benefits and make it safe for traders, especially investors. FINRA in its lots of responsibilities is serving the market in diverse ways, some of which are described below.

  • Implementing rules and setting standards for brokers

FINRA is primarily responsible for the formulation and enforcement of rules for brokers and broker-dealer firms. The body ensures that all brokers within the United States are licensed and registered before offering services to customers.

FINRA provides a platform that educates brokers on the ethical standards required of them to become validated and legitimated in the market. Thus, it further conducts qualification exams for them. Brokers who are able to pass their qualification exams must adequately meet their continuing education requirements in order to remain in the market.

  • Auditing brokers’ operations and detecting bad practices

To maintain its ethical standards among brokers, FINRA also takes the responsibility of monitoring, auditing, and supervising the activities of brokers in the market.

SEC has empowered FINRA with adequate infrastructures necessary to facilitate the supervision of brokers. This way, FINRA can easily detect bad operations among brokers to protect the interest of investors. FINRA processes most of the transactions in order to be able to easily detect manipulative transactions.

  • Impeachment and discipline of bad operations

It will be almost impossible to maintain compliance with rules if there are no provisions for disciplinary actions. In cases where FINRA discovers bad operations among brokers, the body takes disciplinary actions against such acts.

The fear of prosecution will curtail malicious acts to a good extent. It is a very good measure to achieve FINRA’s goals of protecting investors’ interests.

FINRA punishes non-complying brokers in diverse ways. Sometimes the body issues fines or suspends its lawbreakers. It also has the power to disqualify brokers who go against its rules if deemed worthy of disqualification. Moreso, in some cases, FINRA hands over cases of bad operations to the SEC or some other regulatory bodies.

In addition to FINRA’s obligations to the financial market, the body also settles disputes among investors in order to maintain a conducive market environment.

Staying Compliant with FINRA

As said earlier, FINRA aims to make the marketplace for investors following its strict regulations in the market. With the lots of responsibilities performed by FINRA, the body facilitates transparency and safety in the financial market.

Hence, it is mandatory for brokers to comply with the rules provided by FINRA, otherwise become punishable by the industry.

The body provides an educating platform for brokers and firms to update them on the rules implemented by FINRA. It is necessary that concerned members stay updated on FINRA’s rules to maintain compliance with the regulatory body especially in cases of adjustments. The major tools deployable by brokers and broker-dealer firms to help them stay tuned to FINRA’s regulations are the paperless document and the eFileCabinet.

FINRA vs SEC

The Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) are two separate entities with almost similar functions.

FINRA is a regulatory body established under SEC. As such, FINRA is subjected to SEC and it is empowered by SEC. FINRA also enforces regulations that SEC established. FINRA is a non-governmental body, while SEC is a governmental regulatory body that oversees it.

Benefits of Financial Industry Regulatory Authority

FINRA in its exclusive fairness-focused functionalities is most beneficial to investors who seek to venture into the securities market. It is a very reliable resource for investment and security safety as it provides an educative platform for not only brokers but investors as well.

More interestingly, FINRA basically helps potential investors to make smart investment decisions that would pose them to lesser risks.

Moreso, FINRA provides the possibility of recovering manipulated funds for investors. With its investigatory and disciplinary abilities, the body provides the potentials of recovering manipulated funds from bad operators when detected.

Furthermore, FINRA provides a mechanism for investors that can serve as their personal secondary gut check. It has made this possible with its helpline provided free for potential investors to consult whenever they need help understanding the investment world.

Conclusion

FINRA has proven to be a very important body in the financial market. Its ability to secure the finance of the public to a very good extent has established confidence in the minds of potential investors.

Although its compliant terms may seem stressful for brokers and concerned firms, it provides great benefits to brokers and investors.

Brokers and firms who seek to gain a foothold in the financial market with no legal actions against them must register with FINRA, understand its conditions and pass its qualification examinations. It is also important that these firms stay updated to the rules in every possible way they can.

The SEC oversees cases of complains against FINRA and makes the industry adjustments if necessary.

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FAQ

What is FINRA?

FINRA is a private regulatory body, authorized by the governmental body to oversee and regulate the affairs of the American financial system, with the main focus on brokers and brokerage firms.

How did FINRA appear?

FINRA appeared as a new agency created from a merger between the National Association of Securities Dealers, Inc. (NASD)  and the New York Stock Exchange (NYSE).

How does FINRA regulate the financial market?

FINRA regulates the financial market by implementing rules and regulations as well as setting standards for brokers in the industry. Afterwhich it audits brokers’ operations in a bid to detect bad practices.

The body goes further to take disciplinary actions against bad operations as a way to maintain compliance with its rules and regulations and also eliminate bad operators from the market.

What is the difference between FINRA and SEC?

FINRA, the Financial Industry Regulatory Authority is a private regulatory body established and authorized by SEC. Meanwhile, SEC, the Securities and Exchange Commission is a governmental regulatory body that oversees the activities of many regulatory bodies including FINRA.

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