Financial Industry Regulatory Authority (FINRA) Definition

What Is the Financial Industry Regulatory Authority (FINRA)?

The Financial Industry Regulatory Authority (FINRA) is an independent, nongovernmental organization that writes and enforces the rules governing registered brokers and broker-dealer firms in the United States. Its stated mission is "to safeguard the investing public against fraud and bad practices." It's considered a self-regulatory organization.

FINRA was created in 2007 as a result of the consolidation of the National Association of Securities Dealers (NASD) and the member regulation, enforcement, and arbitration operations of the New York Stock Exchange (NYSE). The consolidation was meant to do away with overlapping or redundant regulation and reduce the cost and complexity of compliance.

Understanding FINRA

Oversight Role

The Financial Industry Regulatory Authority (FINRA) is the single largest independent regulatory body for securities firms operating in the United States. It oversaw almost 3,300 brokerage firms, more than 148,700 branch offices, and 628,392 registered securities representatives as of 2023. FINRA has 15 offices across the United States.

FINRA regulates the trading of equities, corporate bonds, securities futures, and options. It's also been authorized by Congress to protect the interests of investors.

FINRA also administers the qualifying exams that securities professionals must pass to sell securities or to supervise others who do. They include the Series 7 General Securities Representative Qualification Examination and the Series 3 National Commodities Futures Examination.

Rules Enforcement

FINRA has the power to take disciplinary actions against registered individuals or firms that violate its rules. It initiated 610 disciplinary actions in 2023 and levied fines totaling $88.4 million. It ordered restitution of $7.5 million to investors and expelled five member firms and suspended another four. It barred 178 individuals from the securities business and suspended 257.

It also referred 623 fraud and insider trading cases to the Securities and Exchange Commission (SEC) and other government agencies for prosecution in 2023.

FINRA maintains BrokerCheck for investors who are shopping for a broker or want to check up on their current broker. It's a searchable database of brokers, investment advisors, and financial advisors. BrokerCheck includes certifications, education, and any enforcement actions taken against these individuals. It draws from FINRA's Central Registration Depository (CRD) database which contains the records of individuals and firms in the securities business in the United States.

Benefits of FINRA

FINRA's main benefit for investors is protection from potential abuses and unethical conduct within the financial industry. FINRA resources such as the aforementioned BrokerCheck allow investors to determine if someone claiming to be a broker is a member in good standing. FINRA prevents many financial crimes by banning brokers who violate its rules of conduct.

FINRA's commitment to and responsibility for these functions was made clear when the NASD and the NYSE's regulation operations were combined into one organization. The SEC approved the consolidation of these two organizations in July 2007.

FINRA described a broad mandate in announcing its formation that included responsibility for "rule writing, firm examination, enforcement and arbitration and mediation functions, along with all functions that were previously overseen solely by NASD, including market regulation under contract for Nasdaq, the American Stock Exchange, the International Securities Exchange, and the Chicago Climate Exchange."

The American Stock Exchange was acquired by the NYSE in 2008. The NYSE was acquired five years later by the Intercontinental Exchange (ICE). The Chicago Climate Exchange, a market for trading greenhouse gas emissions allowances, was shut down after the purchase by ICE of its parent company Climate Exchange Plc in 2010.

Criticism of FINRA

FINRA faces much of the same criticism that's often applied to any self-regulatory organization. Critics such as Senator Warren of Massachusetts and Senator Cotton of Arkansas have claimed that FINRA doesn't do enough to protect investors.

An academic study by Egan, Matvos, and Seru showed that there were issues with repeat offenders. It found that financial advisors with past histories of misconduct were several times more likely to commit offenses in the future. FINRA may have been too restrained in exercising its powers.

The general criticism of self-regulatory agencies such as FINRA is that they do just enough to maintain the public's trust. Self-regulatory agencies have an inherent conflict of interest in this regard.

Members are interested in keeping the public's trust but that interest only goes so far. Members must weed out the worst offenders but they don't want the spotlight on themselves.

It might be possible to rank all members for integrity but that would necessarily result in about half of all members being ranked as below average. Unsurprisingly, self-regulatory agencies rarely rank their members.

The Bottom Line

FINRA was formed in 2007 when operations of the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD) consolidated to create and enforce rules that govern U.S. registered brokers and broker-dealer firms. FINRA also provides resources such as BrokerCheck to safeguard investors. Its goal is to protect them from potential abuses and unethical conduct within the financial industry.

Some critics nonetheless say that FINRA doesn’t do enough and that it has a conflict of interest because it’s self-regulated.