What is FINRA?
The Financial Industry Regulatory Authority, FINRA, is a NGO approved by Congress to protect American traders. Formed in 2007, the organization is the result of the merger of the regulatory committee of the New York Stock Exchange (NYSE) and the National Association of Securities Dealers, Inc (NASD). The objective of this merger was to eliminate overlaps between its regulations and thus reduce the complexity with which brokers and dealers can comply with current regulations.
NASD is an association of stock traders. The organization’s main office is in New York. NASD is known for owning the NASDAQ Stock Market, an automated stock exchange.
FINRA governs and manages the activity between brokers, dealers, and the investing public. The organization has more than 3,500 workers.
A board of governors consists of the FINRA chief executive officer, the NYSE Regulation chief executive officer, 10 financial industry insiders, and 11 governors from the public.
Who Does FINRA Regulate?
The Financial Industry Regulatory Authority regulates broker-dealers and funding portals operating in the United States. It is the watchdog group for the US brokerage industry. The organization regulates brokers, examines their actions, and searches for misconduct by market participants.
FINRA writes and enforces securities laws for brokers, examines broker-dealers to ensure their compliance with rules. The regulator disciplines brokers who break the rules. To scan markets for abuses, Finra employs technology. Thanks to these tools, the regulator gained a good reputation in the market. However, some say that it spends too much time and energy on chasing small violators. Meanwhile, the organization lets large firms go unchecked.
The rules FINRA develops are formulated and promoted with the help of the SEC, the Securities and Exchange Commission, also other self-regulating organizations, and even investors.
FINRA is still using a collection of all FINRA, NASD, and NYSE rules. They receive further reinforcement through notices and guidance. The regulator hopes to issue a combined rule book that would only contain FINRA rules.
Generally, FINRA rules apply to all members. NYSE rules just apply to those members who are also members of the NYSE.
The Difference Between FINRA and SEC
Both regulatory organizations regulate the financial industry and the US financial system. However, they are different entities.
SEC protects investors and ensures that securities markets are kept honest, operating with integrity. SEC is mandated by the US government by way of the Securities Act of 1933 and the Securities Exchange Act of 1934.
FINRA does not belong to the US government. The organization is formed by brokerage firms and exchange markets. FINRA is responsible for regulating and licensing broker-dealers and can only impose its rules on its members.
The SEC is in charge of FINRA.
How Does FINRA Protect Investors?
FINRA guarantees that anyone who sells a securities product has been tested, qualified, and licensed. The organization also ensures that statements about investments are accurate. FINRA also guarantees that brokers make sure the investments they sell are suitable for their clients and that investors receive proper disclosures about investments.
The regulator rules encompass how to properly conduct transactions with clients, communications, and disclosure.
The Regulator’s Track Record
In 2018, FINRA received $61 million in fines. Also, the regulator mandated $25.5 million returned to harmed traders.
In 2017, the organization levied almost $65 million in fines and was able to facilitate almost $67 million in compensation. During the year, FINRA received 3,002 complaints. The organization successfully resolved 936 of them. Meanwhile, the regulator barred 492 individuals and suspended 733 others. They expelled 20 companies and suspended an additional 29.
Notices and Guidelines
In order to give its members immediate and appropriate information, FINRA releases notices. They may include notices regarding a special meeting, elections to select FINRA’s board of governors, changes to FINRA rules, an announcement of new guidelines, member alerts, and cautionary notices, among others.
Besides notices, FINRA also publishes guidelines to help members define and understand FINRA rules. They are available on the regulator website. The guidelines cover topics such as annual examination priorities, letters, communication to firms, testimony requests, reports, trading activity fee, among others.
FINRA is not a governmental organization. Still, it plays a crucial role in regulating financial markets in the U.S. Financial services institutions should understand FINRA’s rules and guidelines to do their part in guaranteeing market integrity.
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