What is the Financial Industry Regulatory Authority (FINRA)?

What does FINRA do?

FINRA is a not-for-profit independent organization that has been given authority to create and enforce rules around how securities brokers and broker-dealers operate. As of publishing, FINRA oversees over 3,300 brokerage firms, over 150,000 branch offices and over 620,000 licensed representatives in the U.S.

FINRA protects consumers from bad actors in the financial industry through regulatory actions, including fines, restitution for affected parties and referring criminal cases to the Securities and Exchange Commission (SEC).

For example, in 2023, HSBC was fined $2 million for failing to disclose conflicts of interest in its research reports over a 10-year period. These reports rated different securities on whether to buy, sell or hold them, but HSBC did not disclose whether it sold the securities mentioned or received any compensation to write about them.

In addition to enforcement, FINRA also administers the exams required to sell securities. This includes the Series 6, Series 7 and Securities Industry Essentials exam.

FINRA vs. SEC

While FINRA handles many regulatory and disciplinary actions of registered brokers and broker-dealers, the SEC handles criminal cases of fraud and other financial crimes. FINRA cannot pursue a legal case against any broker and will instead pass criminal cases along to the SEC, with 970 fraud and insider trading cases sent to the SEC in 2020 alone.

FINRA oversees licensing exams and has a built-in tool for investors to review if any disciplinary action has been taken against a firm or individual (BrokerCheck), but the SEC helps create and enforce securities laws in the U.S.

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History of FINRA

FINRA was created in 2007 to combine the National Association of Securities Dealers (NASD) and New York Stock Exchange Member Regulation organizations. This move was to help reduce redundancy and costs around brokerage and securities regulation.

In a 2007 FINRA press release, it states: “FINRA will conduct the regulatory oversight of more than 5,000 securities firms and 666,000 registered representatives. It will be responsible for rule writing, firm examination, enforcement and arbitration and mediation functions, along with all functions that were previously overseen solely by NASD [...].”

Benefits of FINRA

FINRA is designed to protect investors and regulate the entire U.S. broker industry. This has many benefits, including:

• Streamlined regulation: FINRA is a one-stop shop for everything related to brokerage regulation.
• Investor protection: FINRA is the first line of defense in investor protection, with the ability to levy fines, obtain restitution and suspend or bar financial firms from conducting business.
• Exam issuance: FINRA acts as the single source of securities exams for obtaining licensing as an investment advisor or broker.
• BrokerCheck: The FINRA BrokerCheck tool allows you to research brokers and individuals to ensure they are properly licensed and have no disciplinary actions against them.
• Market watchdog: FINRA acts as a financial market watchdog, ensuring fair and equitable market activity.

FINRA also allows you to file formal complaints against brokers and securities representatives, and will investigate complaints. Ultimately, FINRA protects consumers and gives them a way to pursue restitution and resolution before going to court.

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Criticisms of FINRA

While FINRA does have its benefits, it is not perfect. Here are a few criticisms of how FINRA operates:

• Lack of protection: FINRA has been criticized (even by members of Congress) for a lack of enforcement and consumer protection. In 2022, Senator Warren called into question FINRA’s “ability to fairly and effectively police the financial system.”
• Repeat offenders: A 2016 paper published in the National Bureau of Economic Research (and referenced in a letter from Senator Warren to FINRA) stated that “roughly one third of advisers with misconduct are repeat offenders” and “prior offenders are five times as likely to engage in new misconduct as the average financial adviser.”
• Conflict of interest: As a self-regulatory organization, FINRA has been criticized for having a conflict of interest due to government ties. Though an independent organization, it has authority to levy fines, and earned nearly $1.1 billion in revenue in 2022 alone.
• Lack of transparency: While brokers and representatives are regulated and disciplinary actions are listed, there is no rating system in place for those under FINRA’s regulation, making it difficult for investors to ensure they are working with the best financial firm or individual.

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Bottom line

FINRA handles a bulk of the regulation enforcement and administration for the U.S. brokerage industry. From exam administration to disciplinary actions and fines, FINRA is the first line of defense to protect investors from financial offenders. FINRA also fields consumer complaints and pursues regulatory action on a monthly basis.

But FINRA is limited in its scope and cannot actually pursue legal action against financial firms and individuals. That job is relegated to the SEC, and FINRA simply passes criminal cases along. FINRA isn’t a perfect organization, but it is a place that investors can go to work toward resolution of issues with financial firms.