The Complete Guide to the Financial Industry Regulatory Authority (FINRA)

The Financial Industry Regulatory Authority (FINRA) is the organization in charge of securities licensing and requirements. FINRA develops and enforces rules governing broker-dealer firms operating 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 consolidation of the National Association of Securities Dealers (NASD) 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 engages in purchasing or selling securities for its customers, itself, or both. Capital acquisition brokers engage in fewer activities than broker-dealers, and so they’re subject to reduced regulations. A funding portal is a crowdfunding intermediary.

What Is the Difference Between FINRA and the SEC?

With so many financial institutions to choose from, deciding where to invest can be difficult. Two of the most critical regulatory authorities in the United States financial sector are the Securities and Exchange Commission (SEC) and FINRA.

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 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.

SEC

On the other hand, the U.S. Securities and Exchange Commission (SEC) is a government organization; its purpose is 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 ensuing 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:

1. Companies that sell securities to the general public must be honest and open about their operations and the risks associated with investing.
2. 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.

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 have an interest 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.

FINRA & Technology

FINRA monitors up to 100 billion market transactions every day, using powerful technology to detect potential abuses. Applying a range of data collection techniques, FINRA works to uncover insider trading and any strategies that 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 the enormous volume 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 is used to keep track of trade in the securities and bond markets. It checks hundreds of algorithms and surveillance patterns against vast amounts of 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 assure 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);
• BrokerCheck;
• 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 for 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 particular securities activities in which they will be working. The purpose of the exams is to assure 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 will also need to pass the Securities Industry Essentials (SIE) Exam.

Most firms that hire or train new advisers will have a mandatory licensing program included in their training package, and almost all firms mandate that you must 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 also known as 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, and other personal fixed-income investments, as well as 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 groups of commodity futures.
• Series 79: A Series 79 license is needed if you want 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 on-boarding, account transactions, and movement of funds.

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