Glossary

FINRA Regulations

The Great Recession of 2008 shook America to its core. It dismantled the country’s economic stability and created a hard market crash that required years of recovery. The federal government passed the Dodd-Frank Wall Street Reform and Consumer Protection Act as part of its recovery efforts. Financial professionals credit this for the birth of the Financial Industry Regulatory Authority. 

What Is the Financial Industry Regulatory Authority (FINRA)? 

FINRA was established in 2007 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In this way, it was a direct response to the Great Recession, its causes, and the aftermath. The U.S. Securities and Exchange Commission oversees this private corporation, which acts as a regulator for the securities industry. 

FINRA’s mission is to protect America’s investors by ensuring the securities industry operates fairly and honestly. One unique feature of FINRA is its non-governmental organization status. Consequently, it receives funding through industry fees and not taxpayer dollars.

It is also the most significant regulatory body operating independently in the securities market. As of 2020, it has more than 617,500 registered representatives, oversees more than 152,000 branch offices, and monitors 3,435 securities firms. 

What Are the FINRA Regulations? 

FINRA has a comprehensive set of rules and regulations that apply to firms and individuals who work in the securities industry. The rules help protect investors, prevent fraud, and ensure market integrity. They cover a wide range of topics, such as the following: 

  • Advertising 
  • Arbitration 
  • Brokerage accounts 
  • Commodities 
  • Disclosure 
  • Margin accounts 
  • Research reports 
  • Short sales 
  • Tenders 

FINRA Compliance Requirements 

Complying with FINRA regulations is a legal and operational necessity for firms in the securities industry. Registered firms and individuals must follow FINRA’s rules designed to uphold transparency, investor protection, and market integrity. Core compliance requirements include: 

  • Recordkeeping: Firms must maintain accurate and complete records of communications, transactions, and customer interactions. This includes email messaging apps, voice calls and other digital communications regardless of the device or platform used. 
  • Supervision: Firms are required to establish and maintain supervisory systems to monitor the activities of their registered representatives. This includes proactively identifying and addressing potential violations before they escalate. 
  • Registration and Licensing: Individuals must pass qualification exams and be properly licensed through FINRA before engaging in securities-related activities. Firms must also ensure their representatives stay current on continuing education requirements. 
  • Reporting Obligations: Firms must file regulatory reports with FINRA, including suspicious activity reports, financial disclosures, and trade-related data, often within strict timeframes. 
  • Customer Communications: FINRA enforces rules around how firms advertise, solicit, and interact with clients. Communications must be clear, balanced, and not misleading, and must all be properly archived for future inspection. 
  • Annual Certification: Firms must annually certify that they have adequate compliance procedures in place to detect and prevent violations of securities laws and FINRA rules. 

How FINRA Achieves Its Goals 

It approaches its goal to protect investors and market integrity from several angles. Each angle brings something unique to the table and helps close gaps where unethical practices and fraud can slip through. 

Regulation 

FINRA strives to create a fair and transparent marketplace by implementing rules that protect investors and ensure market integrity. When companies fail to abide by these rules, they have the right to administer punishment. 

Covered parties can find the rules in the FINRA Manual. However, it is essential to treat these as a living document because the organization updates the regulations to keep pace with the market and new developments. 

Enforcement 

FINRA monitors the marketplace for signs of abuse and fraud. It then uses data collected from firms to identify red flags and potential risks. This information helps the organization focus its enforcement efforts where they are most needed and take action when necessary. 

It uses investigations and disciplinary actions to identify and punish firms or individuals who violate FINRA rules and regulations. These actions also serve as a deterrent to future rule-breakers. 

As of 2020, the organization has expelled two firms, suspended two firms, suspended 375 individuals, and barred 246 individuals. It also imposed $57 million in fines and referred 970 insider trading and fraud cases for prosecution. 

Advocacy 

FINRA advocates on behalf of investors at the state, federal, and international levels. The organization also provides regulatory input to help policy-makers create laws and regulations that best serve investors and the securities industry. 

It offers a wide range of investor education resources on its website. These focus on teaching people how to manage their finances, how to protect their money, and how to invest. In addition to these resources, FINRA provides an online BrokerCheck tool that lets investors review the background of current and former broker-dealers and their representatives. 

Issuing and Administering Licenses 

FINRA licenses firms and their representatives who work in the securities industry. These licenses help ensure financial professionals have the knowledge and experience to serve investors properly. 

The organization also administers exams for potential brokers, registered representatives, and investment adviser representatives. These exams test individuals’ knowledge of FINRA rules and the securities industry. As of 2020, it administered 1,272 cycle exams. 

How LeapXpert Can Help 

One of the most critical FINRA rules is the importance of maintaining complete and accurate communication records. Companies now use several different methods to communicate internally, and with customers, so this can create a record-keeping nightmare. 

LeapXpert provides the tools companies need to facilitate secure communication by ensuring thorough records archiving. It meets compliance goals by ensuring you store communications data safely and that the data is easily accessible to authorized persons. 

Are you ready to take another step toward protecting your business from potential issues with FINRA compliance? Contact us to learn more. 

 

FAQs  

Who must comply with FINRA regulations? 

Anyone working in the securities industry – including brokerage firms, registered representatives, and other financial professionals – must comply with FINRA regulations. This includes individuals and entities involved in buying, selling, or advising on securities.  

How does FINRA enforce its regulations? 

FINRA enforces its regulations through regular monitoring, data analysis, investigations, and disciplinary actions. It collects information from member firms to identify potential risks and red flags and then takes enforcement actions such as fines, suspensions, or expulsions against violators.  

How can investors verify if a broker or firm is regulated by FINRA? 

Investors can verify if a broker or firm is regulated by FINRA by using the organization’s free online tool called BrokerCheck. This resource allows users to review the background, registration status, and disciplinary history of brokers and firms.  

What are the consequences of non-compliance with FINRA regulations? 

The consequences of non-compliance with FINRA regulations can be severe and include fines, suspension or expulsion from the industry, barring of individuals and criminal referrals for insider trading or fraud.  

How often does FINRA update its rules and regulations? 

FINRA updates its rules and regulations regularly to reflect changes in the market, emerging risks, and new technologies. These updates are published in the FINRA Manual and through regulatory notices to member firms. 

How does FINRA’s role differ from that of the SEC? 

FINRA’s role differs from that of the SEC in that it is a non-governmental, self-regulatory organization focused specifically on overseeing broker-dealers and securities firms. In contrast, the SEC is a federal agency with broader authority over all aspects of the securities markets, including public companies, investment advisers, and market infrastructure.