Financial Industry Regulatory Authority (FINRA)

The Financial Industry Regulatory Authority (FINRA) is a private, not-for-profit agency authorised by the U.S. Congress to protect American investors from fraud and wrong-doing by securities brokers. It's not part of the U.S. government but is overseen by the Securities and Exchange Commission, which is part of the government.

FINRA regulates U.S. brokerage firms by enforcing its own rules as well as federal securities laws and those of the Municipal Securities Rulemaking Board, a similar organisation that governs the municipal bond market in the States. All brokers doing business in the U.S. must be licensed and registered by FINRA, pass its exams and meet its continuing education requirements. All firms are examined at least once every four years.

FINRA provides surveillance and other regulatory services for U.S. equities and options markets. It also administers a dispute resolution forum for investors and brokerage firms and their registered employees.^[1]

What Does FINRA Do?

Enforcement

To enforce its rules, FINRA conducts routine examinations of brokerage firms, as well as investigates investor complaints and suspicious activity. It reviews all broker "advertisements, websites, sales brochures and other communications to make sure brokers present information in a fair and balanced manner."^[2]

If brokers break the rules, FINRA is empowered to fine, suspend or bar them from the securities industry. Among the illegal activity FINRA looks out for are insider trading "and any strategies firms or individuals use to gain an unfair advantage."^[2]

Market Surveillance

FINRA's review of serious fraud allegations are conducted by its Office of Fraud Detection and Market Intelligence (OFDMI). Created in 2009, the office gathers and evaluates regulatory intelligence from regulatory filings, tips and complaints. It also conducts "robust" insider trading and fraud surveillance.^[3]

To protect the public from unscrupulous brokers, FINRA's BrokerCheck allows investors to research the professional backgrounds of current and former FINRA-registered brokerage firms and brokers, in addition to investment advisers and their agents.^[2]

Dispute Resolution

When disputes between brokers and investors occur, FINRA administers what it says is "the largest forum specifically designed to resolve securities-related disputes between and among investors, securities firms and individual brokers."^[2] It handles nearly all securities-related arbitrations and mediations from more than 70 locations, including at least one in each of the 50 states and Puerto Rico.

Market Regulation

FINRA's market regulation department oversees and regulates over-the-counter trading of securities to ensure they comply with both FINRA rules and federal securities laws. FINRA says the department monitors about "99 percent of the equities market and approximately 50 percent of the options market."^[4] It also provides regulatory services to equities and options markets operated by other self-regulatory organisations.

Investor Education

Through its Investor Education Foundation, FINRA provides individual investors with tools and resources to help them make sound financial decisions and to protect themselves from financial fraud. For example, investors can use its online Fund Analyzer to compare expenses among different funds. The "Risk Meter" helps investors determine if they might be vulnerable to investment fraud, and the "Scam Meter" helps to assess whether an investment may be "too good to be true."^[2]

Governance And Administration

FINRA, which is funded by the securities industry, not American taxpayers, is overseen by a Board of Governors. The board is composed of 24 industry and public members, with 10 seats reserved for industry members, 13 seats for public members and one for FINRA's chief executive officer.^[5]

Seven of the industry seats are designated for firms of various size, with three each from large and small firms and one from a mid-size firm.^[6]

The current president and CEO of FINRA is Robert W. Cook. Before he joined the agency, he served as the director of the SEC's Division of Trading and Markets from 2010 to 2013.^[7]

Summary

The Financial Industry Regulatory Authority (FINRA) is a not-for-profit agency authorised by the U.S. Congress and funded by the U.S. securities industry to protect American investors from fraud and wrong-doing by securities brokers. FINRA is overseen by the Securities and Exchange Commission, and it regulates brokerage firms by enforcing its own rules as well as federal securities laws.

All brokers doing business in the U.S. must be licensed and registered by FINRA and be able to pass its exams. The agency is empowered to fine, suspend or bar brokers from the securities industry who break its rules. FINRA also provides surveillance and other regulatory services for U.S. equities and options markets.