FINRA oversees more than 624,000 registered brokers across the country and it analyzes billions of daily market events. Learn how FINRA began and how it operates today to ensure registered brokers comply with ethical rules.
Definition and Example of FINRA
FINRA—the Financial Industry Regulatory Authority—is a nongovernmental organization that regulates the ethical activities of broker-dealer firms and registered brokers in the U.S. In July 2007, FINRA was created through the consolidation of the National Association of Securities Dealers (NASD) with the member regulation, enforcement, and arbitration operations of the New York Stock Exchange (NYSE). For example, if a broker-dealer misleads you by providing you with false reports that misstate your account performance, FINRA may suspend the broker and issue a fine of $20,000.
How FINRA Works
FINRA’s mission, according to its website, is “to safeguard the investing public against fraud and bad practices.” To be licensed to operate in the U.S., brokers must pass FINRA qualification exams and fulfill continuing education requirements. FINRA examiners review broker advertisements, websites, sales brochures, and other communications to make sure investment information is presented in a fair and balanced manner. FINRA has more than 3,600 employees and 19 offices nationwide. FINRA-trained financial examiners use technology to monitor how brokers are operating. They conduct routine examinations and respond to investor complaints and suspicious activity. Among the information that FINRA publishes is an annual report for FINRA members (brokers) reviewing its examination and risk monitoring program. This program addresses several regulatory key topics in four categories: firm operations, communications and sales, market integrity, and financial management.
FINRA Arbitration and Mediation
Investors can inform FINRA about potentially fraudulent or suspicious activities by brokerage firms or brokers. They can also try to recover damages by filing a request to have FINRA officials arbitrate or mediate a case. In arbitration, the arbitrator’s decision is binding and final. In mediation, either party in a dispute can decide to stop and seek resolution in another manner. FINRA mediators and arbitrators have subject matter expertise in securities matters.
Pros and Cons of FINRA
Pros Explained
Protects investors against abuses and fraud: FINRA is authorized by Congress to protect investors by making sure the broker-dealer industry markets itself accurately, operates fairly, and treats investors honestly.Tests, qualifies, and oversees broker activity: FINRA oversees more than 624,000 registered brokers across the U.S. It certifies brokers through qualification exams and requires continuing education each year.Provides a means for investors to resolve disputes: Investors can file a complaint with FINRA to request that a broker be investigated and seek to recover damages through mediation or arbitration.
Cons Explained
FINRA is not accountable to any governmental body: Critics such as The Heritage Foundation state that the self-regulated FINRA “operates with nearly as much power as a government agency, but without essential checks on that power.”Criticized for not doing enough to protect investors: Some politicians believe that misconduct by brokers has not been sufficiently penalized to deter future improper actions. Other critics believe FINRA needs more transparency.
FINRA is touted as the front-line regulator of broker-dealers in the U.S. and an advocate for investors, but it also comes under criticism for being a self-regulated organization that is not accountable to the Securities and Exchange Commission (SEC) or any governmental body. What’s more, some feel that FINRA does not do enough to fulfill its mission of protecting investors against fraudulent and unethical actions by brokers. U.S. Sen. Elizabeth Warren, D-Mass., is one prominent public figure who has long criticized FINRA for not doing enough to protect investors from fraudulent practices. In a 2016 letter to the then-chairman and CEO of FINRA, Warren and Sen. Tom Cotton, R-Ark., stated that misconduct among brokers and repeat offenders within the securities broker world “persists, in part, because of ineffective sanctions for advisers.”
What It Means for Investors
FINRA plays a key role in protecting individuals against fraudulent or unethical activity on the part of broker-dealers. The FINRA website includes thorough information on filing a complaint. For investors who believe they have been victims of unethical practices by brokers, FINRA also offers a means to resolve disputes and recover damages through arbitration or mediation.
