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What is FINRA?

FINRA plays an important role within the U.S. securities industry, but many people don’t understand what the organization does. FINRA, the Financial Industry Regulatory Authority, protects investors by ensuring that stockbrokers operate fairly.

The History of FINRA

Founded in 1939, the National Association of Securities Dealers (NASD) was born out of the 1938 Maloney Act amendments to the Securities Exchange Act of 1934. These amendments allowed self-regulatory organizations to help the SEC regulate the securities industry. NASD became the largest of these self-regulatory organizations. Under the supervision of the SEC, NASD oversaw the NASDAQ (founded in 1971).

Following the approval of the Securities and Exchange Commission (SEC) NASD merged with the member regulation arm of the New York Stock Exchange (NYSE) to become FINRA in 2007. FINRA is a self-regulatory organization, so its Board of Governors includes members affiliated with broker-dealers—three from small firms, one from a mid-size firm, and three from large firms.

As a nongovernmental organization with 3,600 employees across 14 offices, FINRA oversees over 3,600 securities firms and nearly 630,000 brokers (also known as registered representatives) across over 155,000 branch offices. They are overseen by the Securities and Exchange Commission (SEC) and can enforce SEC regulations. In 2018, they received 3,136 customer complaints. They barred 386 individuals from the securities industry and expelled 16 firms from the securities industry. Following their investigations, FINRA referred 919 fraud and insider trading cases for prosecution.

FINRA administers the Series 3, Series 6, and Series 7 exams and partners with the North American Securities Administrators Association (NASAA), which oversees the Series 63, Series 65, and Series 66 licenses. FINRA also manages the Central Registration Depository (CRD), an internal database containing information about registered representatives and broker-dealers. The publicly-accessible BrokerCheck database contains much of this information and is just one way that FINRA protects investors.

How does FINRA Protect Investors?

FINRA is a self-regulatory organization that oversees the securities industry in the United States. In contrast to the Securities and Exchange Commission (SEC), FINRA is not a government agency. However, most brokers are registered with FINRA.

FINRA analysts monitor around 50 billion market events every day—covering 43,000 different issues. They use more than 230 automated surveillance patterns, looking out for market manipulation. FINRA “oversee[s] 21 equities and options markets operated by all but two U.S. securities exchanges.” The exchanges they monitor include the New York Stock Exchange (NYSE) and Nasdaq, and the BATS exchange (now owned by Cboe Global Markets).

FINRA investigates potential instances of money laundering. The Anti-Money Laundering (AML) Investigative Team makes sure that proceeds from criminal activities don’t end up at member firms.

FINRA examiners spend time out in the field with broker-dealers, conducting sales practice examinations of member firms. In 2015, FINRA examiners conducted 1,500 cycle exams (routine exams) and 4,100 cause exams (exams based on a customer complaint or regulatory tip).

FINRA’s Transparency Services monitors corporate actions, like name changes, “to facilitate compliance with SEA Rule 10b-17 which requires issuers to provide timely notice of certain corporate actions.” While there can be lots of fraud in the over-the-counter (OTC) market, if FINRA finds no issues, they announce the corporate action to the public.

FINRA’s ROOR (Risk Oversight & Operational Regulation) team “works to ensure that securities firms have sufficient capital to operate without putting investors at risk.” In 2015, they conducted 243 exams in 2015, going on-site to regulate member firms. If your firm runs out of capital and goes out of business, you may be able to recover your money through the Securities Investor Protection Corporation, or SIPC. For more information, see our article “Are My Investment Losses Covered by SIPC Insurance?”

For retirees concerned about their investments, FINRA runs the Senior Helpline, based in Boca Raton, Florida. Since the hotline’s inception, more than $2,700,00 has been returned to callers. Don’t hesitate to call this hotline if you are having problems with a broker or have questions about your investments. For more information about how FINRA protects elderly people (and how retirees can protect themselves), see “How FINRA Protects Elderly Investors from Financial Exploitation.”

The FINRA Investor Education Foundation funds the National Telemarketing Victim Call Center in conjunction with AARP. The call center acts as a “reverse boiler room.” The center takes lead sheets (also known as “mooch lists”) from boiler rooms—where unscrupulous and sometimes unregistered brokers cold call vulnerable investors with questionable investment proposals— and warn investors on those lists about potential scams. Many victims of financial fraud, including many elderly investors, have become “fraud fighters” through this program, keeping fraudsters on the line long enough to get information about their schemes before forwarding this information to FINRA.

How Can Investors Protect Themselves?

FINRA’s Investor Education Foundation empowers investors and consumers to enhance their financial literacy through their educational website, SaveAndInvest.org. They provide targeted information to specific groups, like military families and seniors, as well as to the general investing public.

One of the most important things you can do to protect yourself from financial fraud is to “ask and check.” What does that mean? If you’re currently working with a broker, or are thinking about working with a certain broker, ask if he or she is registered with FINRA, the Securities and Exchange Commission (SEC), and/or your state’s securities regulator. If they’re not or they refuse to answer, run away. If they are registered, check BrokerCheck to see if they’ve been involved in any customer disputes or have ever filed for bankruptcy. If your broker or financial advisor can’t even manage their own money, why would you want them managing yours?

If you have questions about your investments or FINRA’s role in regulating the securities industry, don’t hesitate to contact the experienced securities attorneys of Fitapelli Kurta at (877) 238-4175 or info@fkesq.com.