The Financial Industry Regulatory Authority (FINRA) is a self-regulatory organization empowered to oversee U.S. stockbrokers and broker-dealer firms. Brokers are required to be registered with FINRA to conduct trades on behalf of their clients.
Below are the essential aspects of this organization, along with its advantages and distinctions from the Securities and Exchange Commission (SEC).
What is the Financial Industry Regulatory Authority (FINRA)?
FINRA, a non-governmental, self-regulatory organization, is tasked with enforcing a multitude of rules governing brokers and broker-dealer firms in the United States.
With enforcement powers over the brokers and firms under its purview, FINRA wields authority to impose fines and sanctions on those found to be in violation of its regulations. Such sanctions may entail suspensions and, in certain cases, industry debarments.
Additionally, FINRA administers the BrokerCheck database, a searchable online repository containing information about brokers, investment, and financial advisors. This database includes details about members’ certifications, educational backgrounds, and any enforcement actions taken against them.
Overseeing approximately 3,400 securities firms, encompassing roughly 150,000 branch offices, FINRA’s jurisdiction extends to about 612,000 registered securities professionals as of 2021. The organization itself operates 19 offices nationwide, staffed by approximately 3,600 employees.
History of FINRA
Established in 2007, FINRA emerged from the merger of the National Association of Securities Dealers (NASD) and the member enforcement, regulation, and arbitration operations of the New York Stock Exchange (NYSE). The formation of FINRA received approval from the SEC.
Benefits and criticisms of FINRA
While FINRA provides several advantages for investors, it also faces criticism from various quarters.
Benefits
FINRA presents several benefits, including:
- Centralized regulation and oversight of brokers and firms, ensuring compliance with FINRA’s rules. Registered brokers must fulfill annual educational requirements and can face disciplinary measures for non-compliance.
- The BrokerCheck database serves as a comprehensive resource for consumers to research brokers, advisors, and firms. It provides details on violations, sanctions, and the educational background of brokers and advisors.
- A platform for lodging complaints against brokers or firms, with FINRA conducting investigations and taking necessary actions.
- Educational resources for investors and consumers, such as articles and calculators, aiding in informed decision-making.
- Continuous monitoring of financial markets, including transactions and orders, to uphold market integrity for investors.
Criticisms
In addition to its positive aspects, FINRA also faces criticism:
- Insufficient investor protection: Like any self-regulatory organization, FINRA has been accused of not adequately safeguarding investors’ interests. Notable critics of FINRA include U.S. Senators Elizabeth Warren of Massachusetts and Tom Cotton of Arkansas.
- Repeat offenders: There have been instances of brokers engaging in misconduct repeatedly, raising concerns about the effectiveness of FINRA’s enforcement actions.
- Conflict of interest: Critics have argued that FINRA may have a conflict of interest due to its connections to the industry it regulates, potentially compromising its ability to act in the best interests of investors.
Difference between FINRA and the Securities and Exchange Commission
While both the SEC and FINRA contribute to regulating the U.S. financial industry, their roles and powers differ significantly.
The SEC, established as a governmental agency during the Great Depression under the Securities Act of 1933 and the Securities Exchange Act of 1934, holds authority to initiate civil cases against wrongdoers and collaborate with the Justice Department to pursue criminal actions.
On the other hand, FINRA operates as a non-governmental, self-regulatory organization, with its regulatory scope confined to the brokerage industry. The following chart illustrates the primary distinctions between these two entities.
| FINRA | SEC | |
|---|---|---|
| Type of organization | Self-regulatory | Governmental entity |
| Focus | Regulation of brokers and firms within the brokerage industry | Regulation of the financial markets, individual securities and broad enforcement of securities laws |
| Other duties and functions | Manages the BrokerCheck database and provides educational resources for investors. Investigates and handles complaints against FINRA member brokers and firms. Offers an arbitration forum as an alternative to litigation for resolving disputes | Has the authority to enforce securities laws through legal action. Verifies the accuracy of information related to publicly traded securities |
A distinction often drawn between FINRA and the SEC is that FINRA primarily focuses on the human dimension of regulation, overseeing individual brokers and brokerage firms. In contrast, the SEC possesses broader authority, capable of disciplining advisors, brokers, and various other entities. However, the SEC’s regulatory purview extends far beyond this, encompassing the majority of the U.S. securities industry and financial markets.
In Conclusion
FINRA holds a significant role in financial regulation. Brokers and brokerage firms are required to be registered with FINRA. The organization possesses extensive disciplinary authority, such as the ability to suspend or expel individuals who breach regulations from selling securities. Nevertheless, unlike the SEC, FINRA lacks the authority to initiate criminal actions against violators. Furthermore, FINRA’s regulatory jurisdiction is narrower compared to that of the SEC.