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Financial Industry Regulatory Authority (FINRA)

Definition

The Financial Industry Regulatory Authority (FINRA) is a non-governmental organization in the United States that regulates member brokerage firms and exchange markets. It is the successor to the National Association of Securities Dealers (NASD). Its role is to protect investors by ensuring the broker-dealer industry operates fairly and honestly.

Phonetic

The phonetic pronunciation of “Financial Industry Regulatory Authority (FINRA)” is “fahy-nan-shuhl in-duhs-tree reg-yuh-luh-tawr-ee uh-thor-i-tee (fin-ruh)”.

Key Takeaways

  1. Self-Regulatory Organization: FINRA (Financial Industry Regulatory Authority) is the largest self-regulatory organization in the securities industry in the United States. It is dedicated to protecting investors and maintaining the integrity of the market by ensuring that its members comply with ethical and fair practice standards.
  2. Investor Protection: One of the fundamental roles of FINRA is to safeguard the interests of investors. Through its comprehensive regulatory oversight, it aims to prevent fraud, uphold market integrity, and facilitate investor education. It also operates the largest arbitration forum for the resolution of grievances and disputes between clients and their brokers or brokerage firms.
  3. Licensing and Examination: FINRA is responsible for testing, licensing, and registering industry professionals. It conducts comprehensive examinations to ascertain that registered individuals possess the necessary knowledge to carry out their job responsibilities and comply with the securities laws and regulations.

Importance

The Financial Industry Regulatory Authority (FINRA) plays a crucial role in ensuring the integrity and fairness of the financial markets. As a self-regulatory organization, it protects investors by making sure broker-dealer firms and registered securities representatives adhere to strict rules and standards. This includes maintaining ethical practices, promoting transparency, and providing investor education. With its authority to license, regulate, and discipline these entities, FINRA helps to foster trust and confidence among market participants, leading to a healthier and more stable financial industry. Therefore, FINRA plays an indispensable role in safeguarding the interests of investors and the overall financial system.

Explanation

The Financial Industry Regulatory Authority (FINRA) serves as a self-regulatory organization with a core purpose of safeguarding the integrity of the American financial system by ensuring its operation is transparent, fair, and compliant with the existing regulation. It is primarily responsible for the regulation of brokerage firms and exchange markets in the United States. As such, it provides oversight for more than 600,000 brokers across the country and ensures that all participants adhere to the legally established rules in the conduct of business, thereby protecting consumers from potential exploitation and fraud.FINRA’s main function is enforcing compliance with the rules set forth by the Securities and Exchange Commission (SEC) for security firms interaction with the public. It also provides firms and brokers with licenses, tests industry personnel for competency, and adjudicates any complaints and conflicts that arise within its purview. Other roles of FINRA include auditing for compliance, taking disciplinary actions against members who violate regulations, and offering tools and training resources to help firms comply with the rules and regulations within the industry. By fulfilling these responsibilities, FINRA plays a vital role in maintaining a degree of public confidence in the financial markets.

Examples

1. Broker Regulation: FINRA serves as a regulatory body for the 3,700 brokerage firms and around 634,000 registered securities representatives in the United States. It monitors the behaviors of these firms and individuals to protect investors. For example, in 2019, FINRA fined Merrill Lynch $300,000 for failing to supervise a broker who was later found guilty of insider trading. 2. Certification and Training: FINRA also administers the qualifying examinations for registered brokers and their supervisors. As an example, anyone wanting to become a stockbroker has to pass the FINRA Series 7 General Securities Representative Exam, which tests their knowledge of investment-related products and rules.3. Dispute Resolution: FINRA operates the largest securities dispute resolution forum in the United States. For instance, an investor who believes they’ve been wronged by a broker or firm can file a claim with FINRA and the agency can provide arbitration or mediation services to handle the issue. As an example, in 2008, a San Diego arbitrator ordered Wells Fargo & Co. to pay $400,000 in a dispute with an investor over mortgage-backed securities, in a case that was filed and processed through FINRA’s arbitration system.

Frequently Asked Questions(FAQ)

What is the Financial Industry Regulatory Authority (FINRA)?

The Financial Industry Regulatory Authority (FINRA) is a non-governmental organization which acts as a self-regulatory body for brokerage firms and exchange markets in the U.S.

Who oversees FINRA?

Although it’s a private corporation, FINRA is overseen by the Securities and Exchange Commission (SEC).

What is the main function of FINRA?

FINRA’s primary role is to protect investors by maintaining the fairness of the U.S. capital markets. They do this by ensuring the compliance of rules and regulations by brokerage firms and exchange markets.

What happens if a brokerage firm violates FINRA rules?

If a brokerage firm violates FINRA rules, the organization has the authority to enforce penalties ranging from fines to expulsion from the industry.

Is FINRA responsible for creating laws?

No, FINRA doesn’t create laws. However, it forms rules within its jurisdiction that must be observed by member brokerage firms and exchange markets.

Can investors verify a broker’s credibility through FINRA?

Yes, investors can use FINRA’s BrokerCheck service to verify the integrity, credentials, and disciplinary history of individual brokers and brokerage firms.

Who can be members of FINRA?

Broker/dealer firms and licensed securities professionals (brokers) who operate in the United States can become members of FINRA.

What is FINRA’s role in the resolution of disputes between customers and brokers?

FINRA provides a platform for arbitration between customers who have disputes featuring their brokerage firms or individual brokers. It is an alternative to litigation and is usually faster and less expensive.

How does FINRA protect the markets?

FINRA protects the markets by providing surveillance and other regulatory services to equities and options markets. They also closely monitor for fraud, market manipulation, and insider trading to ensure market integrity.

Where is FINRA located?

FINRA’s main office is located in Washington, D.C. However, the organization operates from multiple offices across the United States.

Related Finance Terms

  • Securities Exchange Commission (SEC): The SEC is the governmental agency that works in tandem with FINRA to enforce the laws of the securities industry and protect investors.
  • Broker-Dealer Registration: This refers to the process by which companies and individuals become licensed to trade securities. FINRA oversees this process to ensure that all broker-dealers meet specific qualification standards.
  • Investor Protection: It’s a primary focus of FINRA to protect investors from misleading practices, fraud, and other problematic behaviors common within the financial industry.
  • FINRA Arbitration: This is the legal process that FINRA uses to resolve disputes between investors and brokers or between brokerage firms themselves.
  • Compliance Rules: These are a set of rules established and enforced by FINRA to ensure ethical behavior and transparency in the securities industry.

Sources for More Information

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