The Financial Industry Regulatory Authority (FINRA) is the organization in charge of securities licensing and requirements. Under stringent financial regulations, FINRA develops and enforces compliance risk assessment procedures and rules governing broker-dealer firms in the United States. It also keeps track of securities licenses, audits firms to ensure compliance, promotes market transparency, and educates investors.
FINRA was created due to the National Association of Securities Dealers (NASD) consolidation and the member regulation, enforcement, and dispute resolution operations of the New York Stock Exchange (NYSE) in 2007.
This guide gives a comprehensive overview of FINRA. It will explain the relationship between FINRA’s objectives and risks for banks, the benefits of FINRA, and the licensing examination process.
What Is the Financial Industry Regulatory Authority (FINRA)?
The Financial Industry Regulatory Authority (FINRA) is a non-governmental organization responsible for writing and enforcing rules governing registered broker-dealers and brokerage firms in the United States. It works to protect investors in the United States by overseeing its securities firms’ fair and honest operation. Among its powers are:
- Drafting and enforcing rules governing the ethical activities of all registered broker-dealers and registered brokerage firms in the United States;
- Examining firms for compliance with such standards;
- Promoting market transparency;
- Educating investors.
FINRA is empowered to penalize brokers and brokerage firms that violate its rules. In 2020, it brought 808 disciplinary actions against registered brokers for unethical behavior. It is the most significant regulatory compliance body of its kind.
FINRA regulates broker-dealers, capital acquisition brokers, and funding portals. A broker-dealer purchases or sells securities for its customers, itself, or both. Capital acquisition brokers engage in fewer activities than broker-dealers, so they’re subject to reduced regulations. A funding portal is a crowdfunding intermediary.
What Is the Difference Between FINRA and the SEC?
With many financial institutions, deciding where to invest can take time and effort. Two of the most critical regulatory authorities in the United States financial sector are the Securities and Exchange Commission (SEC) and FINRA.
The Financial Industry Regulatory Authority is in charge of broker-dealer registration and regulation. FINRA is not a government agency, despite its regulatory responsibilities. Instead, it is a non-profit organization that is the largest Self-Regulatory Organization (SRO) in the securities business in the United States.
An SRO is a membership-based organization that develops and enforces federal securities laws for its members. The SEC oversees Self-Regulatory Organizations (SROs), which constitute the front line in broker-dealer regulation.
FINRA oversees about 3,700 brokerage firms and nearly 630,000 registered securities representatives. FINRA employs a staff of 3,600 people across 19 branch offices.
On the other hand, the U.S. Securities and Exchange Commission (SEC) is a government organization that aims to protect investors and assure the integrity of capital markets.
The SEC emerged from the ashes of the stock market crisis in 1929. Following that collapse and the Great Depression, public confidence in the stock market fell to an all-time low.
As a result, Congress enacted the Securities Act of 1933 and the Securities Exchange Act of 1934 to re-establish investor confidence based on two principles:
- Companies that sell securities to the general public must be honest and open about their operations and the risks associated with investing.
- Companies that trade and sell securities must treat investors fairly and honestly.
The SEC is responsible for assuring fairness to the individual investor; FINRA is responsible for verifying that brokers and brokerage firms in the United States operate fairly and honestly. Hierarchically, the SEC is over FINRA and acts as the first point of appeal for actions taken by FINRA.
What Are FINRA Requirements?
Adherence to regulatory guidelines is paramount to ensuring ethical practices and maintaining credibility in the financial realm. For firms in the financial sector, particularly broker-dealers, understanding and complying with FINRA (Financial Industry Regulatory Authority) requirements are vital pillars of operation.
Rule 2265: Transparency in Advisory Services
One of the cornerstones, Rule 2265, illuminates the obligations incumbent upon FINRA member firms offering investment advice. This rule stipulates the necessity of unveiling conflicts of interest to clients. Broker-dealers are required not only to disclose these conflicts but also to establish and uphold supervisory procedures to prevent any transgressions of FINRA regulations.
Rule 2210: Integrity in Sales Literature
In the world of financial services, credibility is indispensable. Rule 2210 delves into advertisements and sales literature content, mandating that FINRA member firms possess a substantiated foundation before advocating any recommendations. This requirement ensures that information disseminated to clients is founded on a secure and justifiable basis.
Rule 3310: Vigilance through Supervisory Procedures
Vigilance is critical in maintaining integrity within business activities. Rule 3310 underscores the significance of written supervisory procedures for brokerage firms. These procedures are pivotal in enabling firms to establish, uphold, and enforce robust supervisory practices, ensuring a thorough oversight of their operational landscape.
Rule 4512: Accessibility of Customer Information
In a commitment to transparency and client-centric operations, Rule 4512 necessitates FINRA member firms to provide customer information upon request. This requirement fosters an environment where information is readily available, promoting trust and accessibility for clients.
Adherence to FINRA regulations spans a vast landscape, touching upon facets like cybersecurity, Anti-Money Laundering (AML) procedures, data archiving, financial markets conduct, and more.
By embedding FINRA’s ethical guidelines across functions, financial institutions reinforce integrity. From AML to archiving, cybersecurity to communications, upholding regulatory standards helps secure the broader financial industry landscape – fostering trust in broker-dealers and markets alike. This protects investors, inhibits malpractice like insider trading, and enables firms to avoid conflicts of interest through proactive compliance.
Who is required to comply with FINRA?
FINRA oversees broker-dealers, registered reps, exchanges, and clearing firms. Compliance with FINRA requirements is compulsory for these financial services entities.
All broker-dealers dealing with the public must register as FINRA members. This necessitates adherence to FINRA compliance standards, including best interest practices. Members must also comply regarding communications with clients.
Registered reps at member firms must regularly qualify on FINRA regulatory obligations. This continuing education covers compliance tools, calendars, data protection, and more.
Member firms must establish recordkeeping, retention procedures, SEC rule alignment, and due diligence in their FINRA compliance programs. Robust messaging oversight is also required.
FINRA can enforce disciplinary actions like suspensions against non-compliant firms. Thus, onboarding, licensing lifecycles, and daily conduct must uphold regulatory guidelines.
The Benefits & Challenges of FINRA
FINRA’s primary benefit is to protect investors by assuring ethical conduct in the financial services industry; the agency does this by monitoring market integrity and implementing market regulation. In addition, FINRA performs arbitration functions for securities-related disputes.
FINRA resources, such as BrokerCheck, allow investors to determine whether someone claiming to be a broker is a member in good standing. In addition, by banning brokers who violate its rules of conduct, FINRA prevents many financial crimes from occurring.
FINRA also aims to ensure that investors have all the information they need to make informed financial decisions and that the information at their fingertips is accurate.
All that said, FINRA faces much the same criticism and challenges that apply to any self-regulatory organization. The general criticism of all SROs of this caliber is that they “do just enough” to maintain public confidence but nothing more.
From this point of view, SROs have an inherent conflict of interest. While members are interested in maintaining public confidence, member firms may hesitate to apply onerous regulations on themselves. Checks and balances are imperative to ensure the effective promotion of market integrity.
How does FINRA enforce its rules?
FINRA has extensive oversight abilities regarding enforcing regulatory compliance among member firms and registered reps. Primary enforcement mechanisms include:
- Examinations: FINRA conducts routine compliance examinations evaluating firms’ supervisory, operational, and risk management controls against FINRA obligations. Deficiencies can prompt disciplinary actions.
- Disciplinary Proceedings: Violations of FINRA regulations can lead to disciplinary proceedings for sanctions like censures, fines, suspensions, or bans. Significant matters get referred to the SEC.
- Fines: FINRA levied over $73 million in fines against firms and individuals in 2022. Penalties get imposed for a range of violations.
- Suspensions and Bans: FINRA suspended 25 individuals in 2022 while banning 14. These actions prohibit further industry participation in regulation breaches.
- Referrals and Reports: FINRA makes hundreds of regulatory referrals to the SEC annually. Its Corporate Adjudication team also issues over 10,000 regulatory reports per year.
By actively examining broker-dealers, pursuing violations, and imposing severe penalties, FINRA enforcement maintains industry accountability. These efforts uphold integrity and ethical conduct across financial markets.
FINRA & Technology
FINRA monitors up to 100 billion market transactions daily, using powerful technology to detect potential abuses. Applying a range of data collection techniques, FINRA works to uncover insider trading and any strategies firms or individuals might use to gain an unfair advantage over investors or other firms.
In this regard, FINRA invests in cutting-edge technology and artificial intelligence (AI) to develop complex surveillance systems, process massive volumes of data, and work with advanced software, programs, and hardware to achieve its goals.
You can visualize the relationship between FINRA and technology in five main functions:
Processes Billions of Transactions per Day
Every day, FINRA processes billions of transactions. FINRA uses cloud computing, data technology, and AI to process enormous amounts of data. The ability to evaluate all transactions in real-time enables FINRA to identify abuse and deception to safeguard investors and, ultimately, the capital markets.
Helps Detect and Prevent Violations in U.S. markets
FINRA’s technology keeps track of trade in the securities and bond markets. It checks hundreds of algorithms and surveillance patterns against vast transaction data to detect market manipulation, insider trading, and regulatory infractions.
FINRA operates various information systems ranging from large structured databases to unstructured content repositories. FINRA also combines search engine and analytics technology to ensure that all the data collected from companies and exchanges is accessible with a single search or query.
Vet Securities Firms and Brokers
FINRA uses modern technology to examine and verify the integrity of security firms and brokers. Approaches and procedures have been modified over the years to conduct a more risk-based approach to the supervisory examinations of firms.
Build and Manage Systems for Regulators
FINRA uses its expertise and technology to deliver regulatory systems to the financial services sectors, such as database and registration programs:
- Central Registration Depository (Web CRD);
- Investment Adviser Registration Depository (IARD) and Investment Adviser Public Disclosure (IAPD).
Contributes to Open-Source Software Community
FINRA is a frequent contributor to the open-source community. Among its current open-source initiatives are:
- Herd. A managed data lake for the cloud. It manages petabytes of data and makes it accessible to any cloud computing platform for processing and analytical purposes.
- Gatekeeper. This self-service web application allows users to request temporary access to Amazon Web Service (AWS) EC2 and RDS instances.
- Fidelius. It provides an easy-to-use, secure, and organized way to create, view, and modify collections of encrypted secrets on Amazon Web Services (AWS) and manage user application access to those secrets.
How Do I Get FINRA Certified?
Securities professionals must pass qualification examinations administered by FINRA to demonstrate their competence in the securities activities they will be working in. The exams ensure that an individual acquires a minimum level of understanding and expertise.
These exams cover various topics related to the securities industry and its regulatory framework. This involves understanding FINRA rules and other Self-Regulatory Organizations (SROs) guidelines.
You can’t sell securities in a brokerage firm without being licensed. The types of licenses you’ll need depend on the broker-dealer that hires or sponsors you. If you plan to obtain the Series 6, Series 7, Series 79, and Series 99, you must also pass the Securities Industry Essentials (SIE) Exam.
Most firms that hire or train new advisers will have a mandatory licensing program in their training package, and almost all firms mandate that you obtain securities licenses. These exams cost $40 to $245.
The most prevalent FINRA securities certifications are listed below:
- Series 6: Administered by FINRA and known as the limited investment securities license, the Series 6 license allows you to sell what are known as packaged investment products.
- Series 7: The Series 7 license is the general securities representative license. It is an introductory-level license that allows you to sell almost any type of individual security, including preferred stocks, options, bonds, other personal fixed-income investments, and all kinds of bundled goods.
- Series 3: The Series 3 license is authorized to sell commodity futures contracts.
- Series 31: The Series 31 license is a branch of the Series 3 license. It is required to sell managed futures, which are commodity futures.
- Series 79: A Series 79 license is needed to provide advice or facilitate debt and equity offerings (public or private), mergers or acquisitions, tender offers, final restructurings, asset sales, divestitures, or corporate reorganizations.
- Series 99: A Series 99 license is required to perform critical functions in the securities industry or broker-dealer operations, such as client onboarding, account transactions, and movement of funds.
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