Among the various regulatory bodies in the United States financial sector, FINRA has one of the largest impacts on the financial industry. The organization has the power to write and enforce rules that govern certain types of financial firms in the US in an attempt to safeguard the public against fraud.
In this FAQ we will cover what FINRA is, who it is responsible for overseeing, what it does, and why it’s important for the overall stability of the United States financial markets.
What Is FINRA?
FINRA is an acronym that stands for Financial Industry Regulatory Authority. It is an independent, nongovernmental organization that has the power to write laws that govern brokers and broker-dealers.
What is a Broker?
Brokers are firms that act as intermediaries between a securities exchange and an individual purchasing and selling securities. These firms take client orders, execute them and provide other market insight and research.
In many cases, brokers offer financial products and services of their own. These products and services are often geared toward high-net-worth individuals.
Historically, brokers were the gateway to the financial markets, afforded only to the wealthy, but in modern times the role of brokers has been to act as an online intermediary allowing investors of all types to execute trades at lower cost, but without financial advice.
A broker must register with FINRA while investment advisors register with the SEC.
What is a Broker-Dealer?
A broker-dealer is an entity (or individual) that engages in the buying and selling of securities on its own account or on behalf of its customers. Most brokerages in the United States fall into this category because they execute trades both on behalf of clients and themselves.
The role of broker-dealers in the financial sector is important as they provide advice to customers, facilitate trading, publish research reports, and, most importantly, supply liquidity through market-making and raise capital for companies.
Broker-dealers fall into two categories: wirehouses, which is a broker-dealer that sells its own products to customers, and independent broker-dealers, which sell products from outside sources.
What Does FINRA Do?
FINRA plays an important regulatory role in the financial markets as it oversees two of the most important players in the sector: brokers and broker-dealers. This means that FINRA effectively regulates all activities related to the trading of equities, bonds, and derivatives.
Aside from overseeing brokers and broker-dealers, FINRA is also responsible for administering the qualifying examinations that securities professionals must pass in order to sell securities and supervise others who sell securities. These examinations include the Series 7, which is the General Securities Representative Qualification Examination.
The organization has the authority to enforce the rules it creates through disciplinary actions including fines, penalties, restitutions, and even barring individuals and firms from participating in the industry. Additionally, FINRA can refer cases of fraud and insider trading to the SEC and other government bodies.
Finally, FINRA manages an online database of all brokers, investment advisors, and financial advisors that can be utilized by individual investors to run background checks and perform due diligence.
Why Is FINRA Important?
FINRA protects investors from being taken advantage of by larger brokers and broker-dealers. Aside from imposing laws and regulating agencies, it also provides investors with resources like BrokerCheck and can ban bad actors that violate its code of conduct.
Additionally, FINRA has prevented many financial crimes from taking place and has created security for non-high-net-worth investors that need low-cost solutions to invest their capital.
In 2007, FINRA consolidated the National Association of Securities Dealers (NASD) and the members that took part in the regulation, enforcement, and arbitration operations at the New York Stock Exchange. This unified the actions of disparate governing bodies into one cohesive organization.
Like any self-regulatory body, FINRA faces criticisms that it does the bare minimum to maintain public trust and does not do enough to protect investors. This means there is a conflict of interest that naturally exists between the organization and those it intends to serve. In other words, the members of FINRA are interested in keeping the public’s trust by weeding out only the worst offenders.
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