Table of Contents
- 1 Key Takeaways:
- 2 What Is the Financial Industry Regulatory Authority (FINRA)?
- 3 What Are the Key Responsibilities of FINRA?
- 4 The History of FINRA
- 5 What Are Securities?
- 6 What Are Self-Regulatory Organizations?
- 7 How Does FINRA Protect Investors in the Securities Market?
- 8 How Does FINRA Impact Investor Protection?
- 9 How Does FINRA Protect Market Integrity?
- 10 FINRA’s Licensing Examinations
- 11 How Can Victims Recover from Investment Fraud?
- 12 How Does FINRA Address Cryptocurrency?
- 13 Conclusion
- 14 Identity.com
Key Takeaways:
- The Financial Industry Regulatory Authority (FINRA), a non-governmental organization, serves as a self-regulatory body overseeing the securities industry in the United States.
- It ensures fair and transparent practices among brokers and brokerage firms, certifying their conduct and adherence to standards.
- Brokers must be formally trained and certified before handling client investments to ensure competency.
- FINRA’s duties encompass rule drafting, enforcement for broker-dealers, compliance monitoring, transparency promotion, and addressing customer complaints.
A doctor’s mistake or a wrong prescription can tragically end a person’s life, highlighting the critical need for regulatory bodies to certify doctors and health practitioners. The primary aim of such regulatory bodies is to safeguard patient well-being. Similarly, in the investment industry, regulatory oversight ensures that investment companies are appropriately licensed, thus mitigating the risk of fraud.
Consider the scenario where someone wakes up one day and proclaims themselves a doctor. This analogy vividly underscores the gravity of entrusting individuals with managing investments. In the United States, aspiring brokers must undergo formal training and certification before assuming the role of managing investments for clients. This stringent process ensures competence and adherence to established standards.
Within the realm of U.S. securities markets, the Financial Industry Regulatory Authority (FINRA) plays a pivotal role in maintaining order and enforcing regulations. Its mandate includes overseeing brokers and investment activities to uphold due diligence and regulatory compliance. Given the high stakes involved, even a single investment error can have devastating consequences, potentially leading to financial ruin.
What Is the Financial Industry Regulatory Authority (FINRA)?
The Financial Industry Regulatory Authority (FINRA) is a non-profit organization responsible for establishing and enforcing ethical standards among registered brokers in the United States. Its primary mission is to safeguard market integrity by ensuring fair and transparent practices within the financial industry. FINRA is widely recognized as the regulatory authority overseeing the certification and conduct of brokers and brokerage firms.
What Are the Key Responsibilities of FINRA?
Below is a simplified list of FINRA’s responsibilities:
- Drafting and enforcing rules for registered broker-dealers.
- Monitoring brokers’ compliance with regulations.
- Overseeing daily market functions.
- Promoting market transparency.
- Addressing customer complaints.
- Providing educational materials for investors.
The History of FINRA
The Securities and Exchange Commission (SEC) oversees FINRA, a self-regulatory organization founded in 2007. While government-approved, FINRA is not government-owned or funded, meaning no taxpayer money is allocated to its operations. The roots of FINRA’s activities extend back to 1934, preceding the establishment of the SEC. Below is a timeline detailing the events that led to FINRA’s formation:
- 1934: The Securities Exchange Act of 1934 was enacted in response to the stock market abuse that precipitated the 1929 financial crash, leading to the creation of the Securities and Exchange Commission (SEC).
- 1939: The National Association of Securities Dealers (NASD) was established and registered with the SEC to prevent past abuses and oversee the activities of its members.
- 1971: NASD introduced the National Association of Securities Dealers Automated Quotations (NASDAQ), a computerized stock trading system.
- 1998: The New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX) merged, forming NYSE American, later known as NYSE MKT.
- 2000: NASDAQ transitioned into an independent entity separate from NASD’s control.
- 2007: SEC approved the merger of NASD and NYSE to establish a new self-regulatory organization (SRO). This consolidation gave rise to FINRA, streamlining compliance and regulatory functions.
Over the years, FINRA has diligently fulfilled its congressional mandate, overseeing more than 624,000 brokers across over 4,500 brokerage firms as of 2020, along with over 162,000 branch offices. Headquartered in Washington, DC, with additional offices in all 50 states, including two overseas offices in London and Puerto Rico, FINRA boasts a workforce of 3,600 individuals.
Given its oversight of vast amounts of data and market events on a daily basis, FINRA leverages AI and machine learning technologies to assist regulators, policymakers, and other stakeholders. As FINRA’s mission revolves around investor protection and market security, it prompts the question: what exactly are “securities”?
What Are Securities?
Securities refer to financial instruments that hold value and are traded in the securities market. These instruments can be issued by governments or private companies and include bonds, stocks, mutual funds, derivatives, and more. In this market, investors buy and sell these instruments, determining prices through the interaction of supply and demand. Brokers and brokerage firms facilitate these transactions. However, the potential for abuses and misuses in trading necessitates regulatory oversight to maintain market integrity, which is where organizations like FINRA play a crucial role in protecting investors.
What Are Self-Regulatory Organizations?
A self-regulatory organization (SRO) is a non-governmental entity established by the Securities and Exchange Commission (SEC) to oversee and regulate professional groups, such as stock brokers and broker-dealers. The SEC supervises the operations, rules, and regulations of these organizations to ensure professionalism, fairness, and ethical conduct within the industries they serve. FINRA stands as a prime example of a self-regulatory organization.
How Does FINRA Protect Investors in the Securities Market?
“FINRA is the first line of defense for investors,” asserts a spokesperson from the agency, echoing its commitment to investor protection. Here’s how FINRA fulfills this mandate:
- Licensing Requirements: Only licensed brokers are authorized to sell securities to investors, ensuring that individuals handling investment products are rigorously tested, qualified, and licensed.
- Product Approval: FINRA rigorously reviews and approves investment products before they reach the market, safeguarding investors by ensuring that only authorized and vetted products are offered for sale.
- Suitability Standards: Brokers are mandated to recommend only products that are suitable for investors’ financial situations and objectives, preventing the pushing of unsuitable products onto investors.
- Truthful Marketing: To counter misleading sales tactics, FINRA mandates that all advertising materials, news, and promises accurately represent investment products, ensuring transparency and fairness in marketing practices.
- Full Disclosure: Investors require brokers to provide comprehensive disclosure of investment products, including potential risks and historical performance, empowering them to make informed decisions.
To achieve all of the above, FINRA enforces rules for brokers, and strict compliance is expected. As a result, brokers and brokerage firms must comply or suffer the consequences. Additionally, the agency ensures that investors are equally informed.
While no agency or institution is flawless, FINRA, too, faces its share of imperfections. However, it’s crucial to acknowledge its positive contributions to investor protection. Here’s an overview of how FINRA has safeguarded investors:
- Enhanced Oversight: Through its structured framework, FINRA enables the verification of brokers’ credentials, preventing unlicensed individuals from engaging in securities transactions. This diligent oversight has spared numerous investors from potential harm.
- Regulatory Enforcement: In instances of misconduct, FINRA takes decisive action against errant brokers and firms, imposing penalties as a deterrent. These measures not only punish wrongdoing but also serve as a warning to others, bolstering compliance with regulatory standards.
- Restitution Support: In cases of investor losses due to malfeasance, FINRA facilitates the recovery process by initiating restitution payments. This financial relief alleviates some of the hardships faced by defrauded investors, offering them recourse and redress.
- Fraud Detection: By actively identifying and referring cases of fraud and insider trading to relevant regulatory bodies, such as the SEC, FINRA contributes to the broader effort of combating financial malpractice. Through these referrals, fraudulent activities are exposed and perpetrators held accountable.
How Does FINRA Protect Market Integrity?
In its mission to protect investors and maintain market integrity, FINRA employs a multifaceted approach. Here are five key strategies utilized by FINRA to achieve this goal:
- Preventing Misconduct through Rule Enforcement: FINRA establishes and enforces rules for all brokerage firms in the U.S., ensuring compliance through rigorous monitoring and examination. Trained financial examiners oversee brokers’ daily operations, while comprehensive reviews of advertising materials promote transparency and investor protection.
- Detecting and Preventing Wrongdoing in U.S. Markets: Leveraging advanced technologies such as artificial intelligence and machine learning, FINRA proactively identifies potential misconduct in the market. By analyzing data, the agency uncovers instances of insider trading and other unethical practices, imposing fines or fraud charges as necessary.
- Disciplining Non-compliant Brokers or Firms: Endowed with authority by Congress and overseen by the SEC, FINRA penalizes individuals or companies attempting to exploit the market for personal gain. Penalties may include fines, suspensions, or bans, reinforcing compliance and deterring future misconduct.
- Investor Education: Recognizing the importance of informed decision-making, FINRA provides educational resources to empower investors. By offering guidance and support through initiatives like the FINRA Investor Education Foundation, the agency equips individuals with the knowledge needed to make prudent investment choices.
- Resolving Securities Disputes: To address conflicts between investors, brokers, and brokerage firms, FINRA maintains hearing locations in all 50 states and offers a toll-free line for dispute resolution. Through these channels, the agency facilitates fair and timely resolutions, promoting confidence and trust in the securities market.
FINRA’s Licensing Examinations
How Can Victims Recover from Investment Fraud?
Investment fraud has left many individuals victimized and their lives disrupted. Regulatory bodies aim to protect the investing public and bring perpetrators to justice. Here’s a comprehensive checklist for victims of investment fraud:
1. Create an Investment Fraud File: Document all relevant information securely, including:
- Perpetrator’s contact information
- Telephone numbers and website address
- Mail and email addresses
- Alleged regulatory registration number of the fraudster (if provided)
- Call notes or records
- Timeline of events
- Police report
- Most recent credit reports from all three credit reporting companies
2. Know Your Rights: Understand that the law offers protections and avenues for seeking justice. The U.S. Department of Justice (DOJ) provides relevant information and services through its Victim-Witness Program.
3. Report Fraud to Regulators: Don’t hesitate to report the fraud to the appropriate regulatory agency, as there are numerous financial crime regulators in the U.S.
4. Report Fraud to Law Enforcement Agencies: Initiate the capital recovery process by reporting to law enforcement bodies for thorough investigation. Relevant agencies include local law enforcement, the local FBI field office, and the district attorney’s office.
5. Follow-Up: After completing the above steps, follow up with the law enforcement agencies used after 30 days to ensure progress.
How Does FINRA Address Cryptocurrency?
FINRA educates the investing public about cryptocurrency through its investor education program, covering topics such as blockchains, bitcoin, non-fungible tokens (NFTs), and stablecoins. It emphasizes the importance of conducting thorough research on cryptocurrencies before investing and warns against potential risks. If proper due diligence is conducted on both the broker and the crypto instrument beforehand, FINRA can provide assistance in cases of breaches, fraud, or other issues harming investors.
Conclusion
In comparison to the Securities Exchange Commission (SEC), FINRA stands as a private and independent regulatory organization. While the SEC, a government-owned entity, oversees all FINRA activities aimed at protecting investors, FINRA holds brokers and brokerage firms accountable for maintaining the integrity of the securities market. Within the bounds set by Congress, the regulatory agency is committed to upholding professional conduct in the securities market, thereby bolstering investor confidence.
Identity.com
Customers’ identity verification is crucial for 21st-century businesses, especially those that deal with financial services, since KYC compliance is a mandatory requirement. FINRA-licensed members are also affected since their clients’ (investors’) details are equally important. With Identity.com, businesses can offer their customers a hassle-free identity verification process. Identity.com provides access to on-chain and secure identity verification through an open-source ecosystem. We improve the user experience and reduce onboarding friction through reusable and interoperable Gateway Passes. Please refer to our docs for more info about how we can help you with identity verification and the general KYC process, including other regulatory compliances.