The Financial Industry Regulatory Authority (FINRA) is a private American corporation that acts as a self-regulatory organization (SRO) which regulates member brokerage firms and exchange markets. FINRA is the successor to the National Association of Securities Dealers, Inc. (NASD) as well as the member regulation, enforcement, and arbitration operations of the New York Stock Exchange. The US government agency which acts as the ultimate regulator of the US securities industry, including FINRA, is the US Securities and Exchange Commission (SEC).
Overview
The Financial Industry Regulatory
Authority is the largest independent regulator for all securities firms doing
business in the United States. FINRA's mission is to protect investors by
making sure the United States securities industry operates fairly and honestly.
In December 2019, FINRA oversaw 3,517 brokerage firms, 153,907 branch offices
and approximately 624,674 registered securities representatives.
FINRA has approximately 3,400 employees
and operates from Washington, D.C. and New York City, with 20 regional offices
around the Unites States.
FINRA offers regulatory oversight over
all securities firms that do business with the public, plus those offering
professional training, testing, and licensing of registered persons,
arbitration and mediation, market regulation by contract for the New York Stock
Exchange, the NASDAQ Stock Market, Inc., the American Stock Exchange LLC, and
the International Securities Exchange, LLC; and industry utilities, such as Trade
Reporting Facilities and other over-the-counter operations.
FINRA was formed by a consolidation of
the member regulation, enforcement, and arbitration operations of the New York
Stock Exchange, NYSE Regulation, Inc., and NASD. The merger was approved by the
United States Securities and Exchange Commission (SEC) on July 26, 2007.
History
The NASD was founded in 1939 and was
registered with the SEC in response to the 1938 Maloney Act amendments to the Securities
Exchange Act of 1934, which allowed it to supervise the conduct of its members
subject to the oversight of the SEC. In
1971, NASD launched a new computerized stock trading system called the National
Association of Securities Dealers Automated Quotations (NASDAQ) stock market.
The NYSE and AMEX stock exchanges merged in 1998. Two years later, the NASDAQ
underwent a major recapitalization and became an independent entity from NASD.
In July 2007, the SEC approved the formation of a new SRO to be a successor to
NASD. The NASD and the member regulation, enforcement and arbitration functions
of the New York Stock Exchange were then consolidated into the Financial
Industry Regulatory Authority (FINRA)
Regulation and Licensure Functions
FINRA regulates trading in equities,
corporate bonds, securities futures, and options. All firms dealing in
securities that are not regulated by another SRO, such as by the Municipal
Securities Rulemaking Board (MSRB), are required to be member firms of the
FINRA.
As part of its regulatory authority,
FINRA periodically conducts regulatory exams of its regulated institutions.
FINRA recently released its tenth annual Regulatory and Examinations Priorities
Letter for 2015, which impacts broker-dealers as well as their affiliated
insurance companies and banks. In its Regulatory and Examinations Priorities
Letter for 2015 FINRA has identified variable annuities as a significant area
of focus for exams in 2015 and has pointed out particular elements of sales
practices that will be reviewed.
FINRA licenses individuals and admits
firms to the industry, writes rules to govern their behavior, examines them for
regulatory compliance, and is sanctioned by the U.S. Securities and Exchange
Commission (SEC) to discipline registered representatives and member firms that
fail to comply with federal securities laws and FINRA's rules and regulations.
It provides education and qualification examinations to industry professionals.
It also sells outsourced regulatory products and services to a number of stock
markets and exchanges; e.g. American Stock Exchange (AMEX) and the International
Securities Exchange (ISE).
NASD, the predecessor of FINRA, founded
the NASDAQ (National Association of Securities Dealers Automated Quotations)
stock market in 1971. In 2006, NASD demutualized from NASDAQ by selling its
ownership interest.
The NASD, later FINRA, publishes much
educational information for the public and has been publishing and disclosing
the education and exam requirements for USA based credentials, charters,
designations and certifications that are offered by SROs for about a decade.
Arbitration of Disputes
FINRA operates the largest arbitration
forum in the United States for the resolution of disputes between customers and
member firms, as well as between brokerage firm employees and their firms. This
function had been performed by both NASD and NYSE's regulation committee until
their merger in 2007 to form FINRA. Each entity had its own set of rules on
arbitration procedures. After its creation, FINRA Dispute Resolution harmonized
the prior NYSE and NASD rules. Virtually
all agreements between investors and their stockbrokers include mandatory
arbitration agreements, whereby investors (and the brokerage firms) waive their
right to trial in a court of law. While arbitration cases are the usual resolution
procedure of last resort, class action cases are brought and often permitted to
go forward in courts as well, where binding arbitration contracts are sometimes
rejected, typically after being ruled unconscionable; see Wilko v. Swan.
Although the fairness of such mandatory arbitration clauses has been called
into question, US federal courts have often found them to be lawful and have
generally upheld both the enforceability and result of these arbitrations,
except in the case of class actions.
As of May 2011, the pool of arbitrators
consisted of 2,854 individuals classified by FINRA as industry panelists and
3,557 individuals classified as non-industry panelists.
In 1987, the United States Supreme Court
ruled in Shearson/American Express Inc. v. McMahon that clauses
mandating arbitration for disputes under the Securities Exchange Act of 1934 were
enforceable. Three years later, it overturned Wilko completely
in Rodriguez de Quijas v. Shearson/American Express Inc., extending the
arbitration requirement to disputes under the Securities Act of 1933. Thus,
many securities disputes are now resolved in arbitration.
For disputes over US$100,000 between
customers and member firms, the panel that decides the case generally consists
of three arbitrators: one industry (or, at the customer's timely discretion
non-industry) panelist, one non-industry panelist, and one non-industry
chairperson, according to the Code of Arbitration Procedure for Customer
Disputes. For disputes between an
employee and member firms, all three arbitrators are industry panelists,
according to the industry code. For a
given case, the two sides are provided separate lists by FINRA of ten local
arbitrators for each category from which each party can strike up to four
arbitrators and provide a ranking for the rest. Also provided are ten-year
biographies and prior award histories for each arbitrator. FINRA will then
provide the parties with the panel members by selecting the highest ranked
available arbitrator from each category.
According to FINRA, there were 5,680
cases for arbitration filed in 2010, a decrease from the 7,137 cases filed in
2009. The percentage of cases in which customers are awarded damages has risen
slightly from 42% in 2008 to 47–48% in 2010 and 2011. FINRA rates any positive award to a customer
as a win for the customer, regardless of the magnitude of losses or legal fees.
FINRA rules do not require parties to be
represented by attorneys. A party may also appear pro se, or be
represented by a non-attorney in arbitration. However, the third option is not
advised since this may be the unauthorized practice of law. Brokerage firms routinely hire attorneys, so
a customer who does not can be at a serious disadvantage. One organization
whose members specialize in representing customers against brokerage firms in
FINRA arbitrations is the Public Investors Arbitration Bar Association (PIABA).
In June 2006, Lewis D. Lowenfels, one of
two partners at the New York law firm of Tolins & Lowenfels and co-author
of the looseleaf treatise Bromberg and Lowenfels on Securities Fraud
and Commodities Fraud, 2d said of the NASD arbitration process: "What
started out as a relatively swift and economical process for a public customer
claimant to seek justice has evolved into a costly extended adversarial
proceeding dominated by trial lawyers and the usual litigation tactics."
Perhaps amidst speculation that the US
Congress was contemplating passing legislation preventing mandatory arbitration
clauses, FINRA announced in July 2008 that it would be launching a pilot
program to evaluate all-public arbitration panels (thus not requiring an
industry arbitrator to be on each panel).
In February 2011, FINRA announced that it would be making the program
permanent. In that announcement, Richard Ketchum, FINRA Chairman and Chief
Executive Officer stated "We believe that giving investors the ability to
have an all-public panel will increase public confidence in the fairness of our
dispute resolution process."There are those, however, who see valid reasons
for including an industry arbitrator on each panel. According to Richard
Jackson, a principal at the advisor firm of Schlindwein Associates, LLC
"It's probably pretty important to have someone on the panel who has
specific industry knowledge and past experience in that field to explain some
of the complexities that may be at issue,"
FINRA does have a broker check system.
This system lists the registered and licensed professionals. Those who have had
complaints will also remain in the online system. Others who have passed exams,
but have let their licenses retire, are not listed in the system if they had a
clean record on their FINRA Form U5.
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