Financial Industry Regulatory Authority - Explained
What is FINRA?
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Table of ContentsWhat is the Financial Industry Regulatory Authority?How Does FINRA Work?The History of FINRAWhat are the Functions of FINRA?
What is the Financial Industry Regulatory Authority?
The Financial Industry Regulatory Authority refers to a self-regulatory organization in the United States that regulates businesses in public investment, such as exchange markets and brokerage firms. FINRA is a merger of the National Association of Securities Dealers and Regulatory Committee, on the New York Stock Exchange. The creation of FINRA was to eliminate the overlapping regulations and to reduce the compliances complexity and cost.
How Does FINRA Work?
FINRA is the largest governing body in the United States that oversees the security firms activities. It operates from its headquarters, in Washington D.C., and in New York, including in other 20 regional offices across the country. It enforces oversight in the investment industry where it imposes fines and initiates disciplinary actions for those firms that violate FINRA's rules and regulations. Its work is to ensure that the securities industry in the United States operates in an honest and fair manner. Its oversight involves the following:
- Ensuring transparency in the security markets
- Writing regulatory laws to govern those entities operating in the security markets
- Evaluating firms that offer professional training to investors
- Verifying the compliance of broker-dealers
The History of FINRA
Before the formation of FINRA, the creation of regulatory rules was under the National Association of Regulatory Authority. (NASD). NASD began its operation in 1936 after it was registered by the Securities Exchange Commission. In 2017, NASD launched the NASDAQ stock market. It, however, underwent a significant recapitalization in 2000 and separated from NASD. After seven years, FINRA was formed with the approval of the Securities Exchange Commission.
What are the Functions of FINRA?
FINRA has, over the years, performed several functions to ensure sanity in the securities markets. It creates rules and regulations that protect investors. Its major functions include the following:
- Creating rules with the help of the Securities and Exchange Commission and making them public to all securities companies, including individual brokers
- It ensures that investors get basic protections, including complete disclosure of all the products they purchase
- It examines securities firms in the United States to ensure that they are operating within the set rules and regulations
- It tests every securities product to ensure that it is qualified and licensed
- Ensures that securities presented in the market are suitable and meets the needs of those investors purchasing them
- Ensures honesty in the presentation of securities' advertisements, websites, and brochures
Another important function of FINRA is anti-money laundering. It ensures that securities firms and brokers comply with the anti-money laundering (AML) rules as well as the Bank Secrecy Act. It creates basic standards for all United States securities firms money laundering compliance programs. It also makes available program templates for smaller firms, including a variety of AML official forms. It also creates finances and penalties. It processes about 50 billion transactions every day. It also does the referral of hundreds of cases to other agencies like the Securities and Exchange Commission.