FINRA is an important regulatory entity that governs all brokerage firms, companies selling securities, and brokers. They license individuals and firms to operate on exchanges and within the market, as well as create all rules governing such operations. If you sell securities as a company, you must comply with FINRA or risk serious legal consequences.
Basics of FINRA
FINRA, or the Financial Industry Regulatory Authority, is a non-profit, independent corporation that is the primary self-regulatory organization (SRO) that regulates the securities industry in the United States. All firms and individual stockbrokers trading in equities, corporate bonds, securities futures, and options that are not members of another SRO, such as municipal securities, must be members of FINRA and comply with their rules in order to operate on the exchanges that they govern or in OTC markets.
What FINRA Does
In order to sell securities, you must be a registered member of an SRO, usually FINRA. FINRA writes the rules that regulate stockbrokers, brokerage firms, exchanges, including NASDAQ and the New York Stock Exchange, and the people working in securities industry as a whole. Essentially, the purpose of FINRA is to make sure the securities industry operates fairly and honestly by ensuring that all people selling in this market follow certain rules and restrictions.
Much of what FINRA does is to enhance transparency in the securities market and to educate investors by ensuring:
- investors receive securities that are suitable to their needs and are given proper disclosures before any investment;
- anyone who sells securities in the U.S. has been tested, qualified, and licensed in the rules and restrictions that apply;
- securities advertising is truthful, and not misleading; and
- all stockbrokers and brokerage firms are held to the rules that FINRA and the SEC put in place.
FINRA Enforcement and Compliance
FINRA has power under the SEC’s authority to punish any violators of its rules or laws relating to the sale of securities. Enforcement actions against firms and individuals can lead to large fines or even being banned from operating in securities markets, so FINRA compliance is vital for all brokers and brokerage firms. Exactly what your company’s compliance needs will entail will depend on which securities you sell and how, so the best way to get clarity on your compliance needs is to speak with a securities lawyer. Still, at the very least, you must ensure that all brokers are properly licensed and continuing to follow FINRA regulations.
FINRA also operates the largest arbitration forum in the United States for the resolution of disputes between customers and member firms. Since almost all investors are bound to arbitration by their brokerage agreement, FINRA is often the only forum for these disputes to be resolved if mediation is not successful. FINRA also arbitrates disputes between brokerage firms and their employees. FINRA’s arbitration forum has its own rules for procedure, so it is important to consult a securities lawyer with experience in this area if you are party to such a case.
What’s the difference between the role of SEC vs. FINRA?
FINRA and the SEC both operate to protect investors, but the SEC has a much wider purview than FINRA. FINRA mostly only regulates those people selling securities, while the SEC regulates the industry as a whole, including companies issuing securities, investors, and everyone in between. FINRA basically operates under the SEC to ensure that people selling securities are operating in a fair and honest manner.