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Understanding the Financial Industry Regulatory Authority (FINRA) and FINRA Rules

by Chris Brook on Monday July 23, 2018

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Learn about the Financial Industry Regulatory Authority, or FINRA, its function, and the scope of its rules, in this week's Data Protection 101, our series on the fundamentals of information security.

The Financial Industry Regulatory Authority, or FINRA, is a self-regulatory organization that oversees and regulates the actions of its members. Members of FINRA include exchange markets and brokerage firms.  This private corporation used to be known as the National Association of Securities Dealers.

In 2017, FINRA reported more than 630,000 registered representatives and more than 3,700 securities firms.

Who Heads FINRA?

The Financial Industry Regulatory Authority has more than 3,500 employees and bases its operations out of New York and Washington, DC. The two primary operational bases are supplemented by 16 regional offices scattered all around the United States.

A board of governors oversees FINRA, made up of the FINRA chief executive officer, the NYSE Regulation chief executive officer, 11 governors from the public, and another 10 industry insiders. Currently, the board of governors includes people working for The Travelers Companies, Ogilvy & Mather, Harvard Kennedy School of Government, Washington University in St. Louis School of Law, Harvard Business School, Cambridge Investment Research, and FINRA CEO Robert W. Cook.

Difference Between FINRA and the Securities and Exchange Commission

While both the Financial Industry Regulatory Authority and Securities and Exchange Commission regulate the financial industry and America's financial system as a whole, they are two distinct entities. The SEC's main function is to protect investors while also ensuring that securities markets are kept honest and operate with integrity. The SEC is mandated by the United States government by way of the Securities Act of 1933 and the Securities Exchange Act of 1934.

FINRA, on the other hand, is not part of the U.S. government. Instead, it is composed of brokerage firms and exchange markets. The self-regulatory FINRA can only impose its rules on members, and it is responsible for regulating and licensing broker-dealers. FINRA is also under the purview of the SEC.

In short, FINRA is tasked with regulating brokerage firms and stockbrokers, while the SEC is more focused on individual investors.

Function of the Financial Industry Regulatory Authority

Over the years, FINRA has taken on several roles including:

  • Regulating all trading in corporate bonds, equities, options, and securities futures. 
  • Being responsible for ensuring membership from firms, which are not under the Municipal Securities Rulemaking Board and other self-regulating organizations. 
  • Conducting exams for members, including the yearly Regulatory and Examinations Priorities Letter, which affects associated insurance companies, broker-dealers, and banks. 
  • Licensing individual brokers and firms. 
  • Coming up with rules to oversee their members and checks for member compliance to regulations. 
  • Disciplining members who fail to obey with the organization’s rules and federal securities regulations.
  • Preparing materials for qualification and education examinations for brokers and other industry professionals.
  • Supplying outsourced regulatory services and products to the American Stock Exchange, the International Securities Exchange, and other stock exchanges and stock markets.

One of the main functions of FINRA is to come up with rules and guidance for its members to protect investors and ensure that the integrity of the market is upheld. FINRA enacts these rules and then publishes them to all securities firms and individual brokers.

These rules are formulated and promulgated with the help of the Securities and Exchange Commission, other self-regulating organizations, regulators, and even investors.

As of now, FINRA is still using a transitional rulebook, a collection of all NASD, FINRA, and NYSE rules. In time, however, FINRA hopes to publish a consolidated rulebook that would contain only FINRA rules, slowly easing out NYSE and NASD-based policies. 

FINRA rules are further supplemented by notices and guidance.

FINRA Notices

FINRA releases notices that give members prompt and timely information on several issues, which may include notices of special meetings, elections, or changes to FINRA rules, among others. You can find all FINRA notices on their Notices Subject Index. Some recent notices include:

  • Election notices to select FINRA's board of governors
  • Call for comments on various enhancements on a number of FINRA rules
  • Changes in fees
  • Announcement of new guidelines
  • Member alerts and cautionary notices

FINRA Guidance

FINRA regularly publishes a set of guidelines that will help members clarify and understand FINRA rules, which can be found under Guidance on the FINRA website. The topics covered include:

  • Annual Examination Priorities Letters
  • Communication to FIRMS
  • Frequently Asked Questions
  • SEC Rule 605
  • Testimony request
  • Reports and studies
  • Trading activity fee

Scope of Financial Industry Regulatory Authority Rules

FINRA's rules cover every aspect of a broker-dealer's operations. The rules begin with ethics and behavior expected from members, the prohibition on using deceptive, manipulative, and fraudulent tactics, and other standards of behavior related to duties and conflicts.

FINRA rules also encompass how to properly conduct transactions with clients, communications and disclosure, selling special products, supervisory responsibilities, anti-money laundering practices, operational rules, trading best practices and standards, reporting, and clearing requirements, among others.

Additionally, the rules cover investigations and sanctions, code of procedure, disciplinary proceedings, and other relevant topics, as well as the Uniform Practice Code, arbitration procedures with customers and other members, and the mediation rules.

In general, FINRA rules apply to all members. However, the NYSE rules only apply to those FINRA members who are also members of the New York Stock Exchange.

FINRA’s Track Record

In 2017 alone, the Financial Industry Regulatory Authority levied close to $65 million in fines and was able to facilitate close to $67 million in restitution. 

Out of 3,002 complaints received during the year, 1,369 disciplinary actions were filed, while 936 were successfully resolved. The regulatory body has also barred 492 individuals, while suspending 733 others. They also expelled 20 firms and suspended an additional 29. It was able to refer for prosecution 855 insider trading and fraud complaints during the year.

While FINRA isn’t a government entity, it plays an important role in regulating financial markets in the United States. Financial services institutions should be familiar with FINRA’s rules and guidelines to do their part in ensuring market integrity.

Tags:  Data Protection 101 Financial Services Industry Insights

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