Financial Industry Regulatory Authority

Definition

The Financial Industry Regulatory Authority (FINRA) is a non-profit organization that regulates member brokerage firms and exchange markets in the United States. It plays a critical role in protecting investors by ensuring the integrity of the securities industry through regulation and oversight of broker-dealers, facilitating a fair and efficient market. FINRA is responsible for enforcing rules governing the conduct of financial firms and has the authority to develop regulations to protect investors and maintain market integrity.

5 Must Know Facts For Your Next Test

1. FINRA was established in 2007 from the consolidation of the National Association of Securities Dealers (NASD) and the regulatory functions of the New York Stock Exchange.
2. The primary functions of FINRA include writing rules that govern the activities of broker-dealers, examining firms for compliance with these rules, and enforcing disciplinary actions when necessary.
3. FINRA also operates an investor education program that aims to increase awareness about investment risks and promote informed decision-making among investors.
4. As part of its regulatory duties, FINRA maintains a public database called BrokerCheck, allowing investors to research the background of financial professionals and firms.
5. FINRA's operations are funded by fees collected from member firms, which means it is financially independent from taxpayer funding.

Review Questions

• How does FINRA ensure investor protection in the financial markets?
  • FINRA ensures investor protection by regulating broker-dealers, enforcing compliance with industry rules, and conducting examinations to monitor firms’ activities. By setting standards for ethical conduct and providing education on investment risks, FINRA promotes transparency and trust in the financial markets. Additionally, through its disciplinary actions against firms that violate regulations, FINRA maintains accountability within the industry.
• Discuss the relationship between FINRA and the Securities and Exchange Commission (SEC) in terms of regulatory oversight.
  • FINRA operates as a self-regulatory organization (SRO) under the supervision of the SEC. While FINRA has the authority to create rules for its member firms and enforce compliance, the SEC oversees these actions to ensure they align with federal securities laws. This partnership helps maintain a balanced regulatory framework where FINRA addresses day-to-day regulatory matters while the SEC focuses on broader enforcement of federal securities regulations.
• Evaluate how FINRA's establishment impacted the regulation of brokerage firms and investor confidence in financial markets.
  • The establishment of FINRA significantly enhanced the regulation of brokerage firms by consolidating multiple regulatory functions into a single organization focused on investor protection. This consolidation streamlined oversight processes, making it easier for investors to trust that brokerage firms are held to high standards of conduct. As a result, investor confidence in financial markets improved because FINRA's rigorous enforcement of rules helped mitigate fraud, promote transparency, and maintain fair trading practices.

Related terms

Securities and Exchange Commission (SEC):

The SEC is a U.S. government agency that enforces federal securities laws and regulates the securities industry, overseeing securities exchanges, brokers, dealers, investment advisors, and mutual funds.

Broker-Dealer: A broker-dealer is a person or firm in the business of buying and selling securities for its own account or on behalf of its customers.

Self-Regulatory Organization (SRO): An SRO is a non-governmental organization that has the authority to create and enforce industry regulations and standards, such as FINRA, which supervises brokerage firms and their professionals.