FINRA regulates broker-dealers and enforces industry rules.
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Financial markets move fast and often involve complicated financial products, which makes oversight and investor protection an important part of the financial system. The Financial Industry Regulatory Authority (FINRA) plays a central role in regulating brokerage firms and the brokers who work for them.
FINRA oversees broker-dealers, licenses securities professionals, enforces conduct rules, and provides tools that help investors research brokers and brokerage firms. It operates as a self-regulatory organization (SRO) under the supervision of the Securities and Exchange Commission.
FINRAâs origins and structure
FINRA in its current form was established in 2007 through the consolidation of two predecessor organizations, the National Association of Securities Dealers (NASD) and the regulatory arm of the New York Stock Exchange (NYSE). The merger was intended to streamline oversight of broker-dealers and eliminate overlapping regulatory functions.
FINRA, CFTC, SEC, NFA ⊠What do all the letters mean?
FINRA is one of several financial regulators and self-regulating organizations (SROs) that act as the âmarket police.â
Before the merger, the NASD and NYSE Regulation each maintained separate regulatory systems for broker-dealers. By combining them, FINRA became the largest independent regulator of U.S. securities firms, overseeing thousands of firms and registered representatives. Brokerage firms that conduct securities business with the public are typically required to be members of FINRA, and many securities professionals must register with the organization. Based in Washington, D.C., FINRA includes more than 3,000 member firms and more than 625,000 registered representatives.
FINRA hasnât been around as long as the SEC, which was established by the Securities Exchange Act of 1934. Still, FINRAâs regulatory framework traces back to the late 1930s, when its predecessor, the NASD, was registered with the SEC in 1939.
NASD members were required to follow rules governing broker conduct and trading practices. The NASD began enforcing these rules under the supervision of the SEC, censuring, fining, and expelling members for misconduct.
FINRA and the SEC are both dedicated to investor protection, but their roles and structures differ in several ways:
- Regulatory scope. The SEC is a government agency responsible for overseeing the entire securities industry, including public companies, investment advisors, and mutual funds. FINRA focuses specifically on broker-dealers and their representatives.
- Authority and enforcement. The SEC has broader enforcement powers; it can bring civil enforcement actions in federal court and refer potential criminal cases to the Department of Justice. FINRAâs authority is generally limited to administrative actions within the broker-dealer community.
- Structure. FINRA is an SRO funded primarily by the firms it regulates, while the SEC is funded through congressional appropriations offset by industry fees.
- Investor education. Both organizations provide educational resources for investors, although FINRAâs tools and databases are often focused on researching brokers and brokerage firms.
FINRA regulates broker-dealers operating in the over-the-counter market, as well as those participating in major exchanges such as the NYSE and Nasdaq.
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How FINRA regulates brokers
FINRAâs core functions include regulating broker-dealers, enforcing compliance with securities laws, and protecting investors.
- Licensing and registration. FINRA requires broker-dealers and many of their representatives to meet stringent qualifications, including passing exams such as the Series 7 (General Securities Representative Qualification Exam) and the Series 63 (Uniform Securities Agent State Law Exam). It also maintains the Central Registration Depository, a database of registered individuals and firms.
- Rulemaking. FINRA develops and enforces rules governing the conduct of broker-dealers, including standards for ethical behavior, disclosure requirements, and trading practices.
- Market surveillance. FINRA monitors trading activity in various markets, including equities, options, and fixed-income securities, to detect potential fraud, manipulation, and insider trading.
- Investor education. FINRAâs Investor Education Foundation provides resources to help investors understand financial products and make more informed decisions.
For example, FINRAâs BrokerCheck tool allows investors to research the background and disciplinary history of brokers and firmsâinformation that can help them evaluate financial professionals before opening an account or making investment decisions.
FINRA enforcement and dispute resolution
FINRA enforces its rules through several mechanisms, which include:
- Examinations and audits. FINRA conducts regular inspections of broker-dealers to assess their adherence to regulatory requirements. Firms found in violation may face penalties or corrective actions.
- Disciplinary actions. FINRA can impose fines, suspend licenses, or expel firms and individuals from the industry.
- Arbitration and mediation. FINRA operates a dispute resolution forum where investors and brokerage firms can resolve disputes outside of court.
FINRA regularly brings disciplinary actions against firms and individuals for violations such as misleading communications, unsuitable investment recommendations, or failure to supervise employees. Together with its licensing, rulemaking, and market oversight responsibilities, these enforcement tools help maintain standards within the brokerage industry and provide investors with mechanisms for addressing disputes.
This article was most recently revised and updated by Bruce Blythe
