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Broker-dealers and registered brokers need a set of rules to abide by. If no such rules were in place, these financial professionals would pursue their self-interest to the extent that it proves destructive for retail investors and the industry as a whole.
Furthermore, an unbiased source must enforce the nuances of rules for the sake of fairness and transparency.
If no rules were in place, broker-dealers and registered brokers would be unworthy of the public’s trust.
Maintaining such trust through broker transparency is the role of the Financial Industry Regulatory Authority (FINRA). Below, we provide a look at what FINRA is all about and why it is so important.
What Is the Financial Industry Regulatory Authority (FINRA)?
FINRA, short for Financial Industry Regulatory Authority, is an objective nongovernmental entity that creates and enforces the rules pertaining to broker-dealers and registered brokers operating in the United States.
FINRA’s mission is to protect investors against bad practices and fraud. This self-regulating organization was created when the National Association of Securities Dealers (NASD) and the regulatory committee of the NYSE consolidated into a single entity.
FINRA ultimately oversees brokerage firms, providing essential oversight that safeguards investors. Acting independently, FINRA is able to hold brokers and licensed advisors accountable for malpractice and fraudulent activities.
What Does FINRA Do?
FINRA is responsible for writing, implementing, and enforcing rules that govern brokers in the United States of America. Acting as an independent third-party governing body, FINRA brings transparency, honesty, and fairness to the financial markets.
In a nutshell, FINRA oversees brokers and securities firms. This group also provides qualifying exams financial professionals must pass to supervise the buying and selling of securities on behalf of clients.
FINRA also provides valuable resources to retail investors that ultimately help them protect their financial assets from fraudulent actors and activities. The ultimately role and responsibility of FINRA is to protect investors and maintain the public’s trust.
Responsibilities of FINRA
The overarching responsibility of FINRA is to guarantee the securities industry operates in a fair, transparent, and straightforward manner.
This agency aims to ensure all investors receive essential protections and are provided with full disclosure before investing in specific securities. FINRA also ensures brokers and financial professionals advertisements are not misleading.
Furthermore, FINRA is responsible for ensuring those who sell financial products are properly qualified and licensed. The Financial Industry Regulatory Authority does this by deploying leading technology and market intelligence that constantly monitors all licensed brokers and financial professionals. Think of FINRA as the first-line of defense for everyday investors. They uphold the integrity of America’s Financial Markets.
What Does It Mean to be Registered with FINRA?
Brokers are required to register with FINRA. To register, brokers and financial professionals are required to pass an exam and certification process that reviews them for proper disclosures, security protocols, and more.
However, once registered, Brokers and Financial Professionals that sell securities are required to complete ongoing education courses. This ensures all parties are up to date on newly passed regulation and standards.
Why Does FINRA Matter to Investors?
Investors benefit from FINRA as it provides a level playing field with brokers, institutional investors, and others who otherwise might enjoy a competitive advantage.
FINRA essentially creates investment opportunities for everyday people, known as retail investors. The agency maintains a database of brokers that can be searched with ease.
This database, known as BrokerCheck, provides broker details, including education level, enforcement actions, certifications, and more. More importantly, FINRA ensures the United States Financial Marketplace is ethical.
What Is the Difference Between FINRA and SEC?
FINRA is the primary group that regulates and monitors brokers and brokerage firms in the United States. However, FINRA is not the same as the SEC.
Though there are some similarities between these two organizations, they have distinct differences.
The Securities and Exchange Commission (SEC) is focused on ensuring transparency and fairness for investors.
This SEC is the main watchdog over Wall Street and the Financial Markets. Though few know it, the truth is that the SEC has oversight over FINRA. The SEC and its directors are the ones who prosecute security professionals and brokers for malpractice.
>> More: FINRA vs. SEC
Can FINRA Send You to Jail?
FINRA is not considered a government organization. Therefore, FINRA cannot send people to jail, even if they egregiously violate governing rules or other laws.
FINRA continuously observes broker operations. This group completes examinations to determine whether the brokers are operating in full compliance with FINRA rules.
There are penalties for violations, and in most cases, FINRA will present information to the SEC for prosecution and further litigation. Even something as seemingly minor as the dishonest and unfair presentation of marketing information on websites, brochures, and other advertisements will be penalized.
This group can bring disciplinary action in the form of hefty fines, broker suspensions, and outright bans.
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Bottom Line: What Is FINRA?
FINRA is a nongovernmental organization that oversees, examines, and penalizes brokers and broker-dealers throughout the country.
FINRA’s regulatory oversight of equities, securities futures, corporate bonds, and options ultimately ensures trading is fair for retail investors.
This is the United States’ largest objective regulatory agency for securities firms. All in all, FINRA oversees a whopping 3,600+ brokerage firms, spanning nearly 155,000 branch offices and in excess of 600,000 registered securities professionals.
FINRA’s overarching aim is to protect investors against fraud, to maintain financial market integrity, and to govern brokers and financial professionals who sell financial products.
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