Financial Industry Regulatory Authority (FINRA) is a self-regulatory, non-governmental organization based in the U.S that supervises stockbrokers, their dealers, and the exchange market.
This organization focuses on safeguarding the value of the financial system of America with zero cost to taxpayers. Although the Exchange Commission and Securities are superior authorities in this industry, FINRA still plays a major role in safeguarding investors. Its mission is to protect the public against corruption and poor practices.
What Does FINRA Do?
FINRA ensures that the public is protected from making bad investment choices and alerts them on when they are susceptible to fraud. Additionally, they work with brokerage firms to overlook the brokers to ensure everyone invests wisely. However, let’s take a more in-depth look at what they do.
Brokerage Firms
A brokerage firm acts as the intermediary that links buyers to sellers in order to enable transactions. Typically, they receive their payments by commissions or fees that are charged once a transaction has been completed successfully.
FINRA ensures that these firms are protected and that they do not break any of the codes of conduct by getting involved with bad investment practices.
Disciplinary Action
Oftentimes, FINRA publicizes their guidelines so that its partners, counsels, and persons connected will know what kind of disciplinary measures await anyone that defaults.
Disciplinary actions are enacted on brokerage firms when they infringe on the FINRA rules and regulations. For example these rules include Federal Security Law and the Municipal Securities Rule-making Board Rules.
When these firms fault these rules, they are often charged fines or suspended depending on the level of faulting they did. But, in the place of serious misconduct, they could be barred from the brokerage industry.
However, not all investigations will end in formal disciplinary action. Sometimes, it could be a minor case such as the absence of a client or detrimental impact. However, these defaults could be responded with just a warning action. These actions are considered by the staff in any future disciplinary action that may occur.
BrokerCheck
Brokercheck helps you as an investor to make knowledgeable choices when it comes to brokers and their firms. They also allow investment advisors to give out the information they may have regarding brokerage firms.
Such information could be how appropriately the firm is registered by the law to sell securities (such as bonds, mutual funds, and more). Most importantly, you’re able to know the history of a firm, their licensing Information, and regulatory actions, through a Brokercheck.
As an investor, whatever information you’re likely to get from Brokercheck will be very resourceful and to your advantage.
History of FINRA
FINRA has been in existence since 2007. Its prototype organization extends as far back as the first half of the 20th century. An early oversight group – the National Association of Security Dealers (NASD) was founded in 1939.
They registered with the Securities and Exchange Commission (SEC) according to the 1983 Maloney Amendment Act. Additionally, NASD’s aim was to avoid the misuse of the United States Stock Exchange.
In 1971, NASD moved on to establish its Stock Market system – the National Association of Securities Dealers Automated Quotations (NASDAQ). Thereafter, in 1998, there was a merger with two Stock Exchange companies the NYSE and AMEX.
Two years down the line (in 2000), there was a recapitalization by NASDAQ which led to their independence away from NASD. With that, the SEC authorized a new Self-Regulatory Organization (SRO) to become a successor to NASD in July 2017.
The NASD, regulatory members, and arbitrary functions of the NYSE were consolidated to form the Financial Industry Regulatory Authority (FINRA).
What Does It Mean to Be Registered With FINRA?
It is pertinent that every brokerage firm gets registered with FINRA. Moreover, this is because FINRA has gradually become a standard government entity. Registration with FINRA enables firms and investors to carry out securities transactions with the investing public. To get registered, securities experts are expected to meet some requirements as stated below.
Process of Registration
In a rundown, here is how you can get registered with FINRA.
- You need to trade securities: This can be either bonds, stocks, or mutual funds
- You need to pass the qualification exams: Some of these exams written are series 7, SIE Exam, series 63, series 24, and series 26. These exams need to be written and passed.
- Getting registered as a Foreign Associated: If you get registered as a foreign associate, you may have to keep that registration. This is because if it ever gets terminated, they may not be able to re-register as a foreign associate.
- Get registered as a representative: This form of registration is for individuals who are actively involved in the investment of a firm or securities. Their obligations are to solicit, supervise, and train individuals.
- Get registered as a principal: This form of registration is for persons actively involved in managing the investments of firms and securities. These persons are Officers, Partners, Sole Proprietors, Office Managers, and Directors.
FINRA License Requirements
If you are certain you want to trade securities, then you need to qualify to attain its license. Here is a rundown of what it entails to get the license:
- Understand what FINRA is
- Determine to take the exams or not
- Determine what security license you need.
- Check the requirements for your state
- Study the license exam, take it and endeavor to pass it.
- Once you’ve passed the exam, you move on to register your license with FINRA and a stock-dealer. They will hold your license and supervise your business for a percentage of the commission earned.
Expenses & Membership Fees
To become a member, there are fees required to be paid. In short, this fee is called the new membership application fee. Moreover, the price for this fee varies from $7,000 to $55,000 or more depending on the quantity of the application of the new member. This is illustrated with a table below.
Also, for a new member that intends to engage in carrying and clearing activities, an extra $5,000 fee is requested of the person.
| Number of Registered Applicants | Small | Medium | Large |
| Tier 1 | 1 – 10 | 151-300 | 501 – 1000 |
| Tier 2 | 11 – 100 | 301 – 500 | 1001 – 5000 |
| Tier 3 | 101 – 150 | More than 5000 |
| Application Fee | Small | Medium | Large |
| Tier 1 | $7,500 | $25,000 | $50,000 |
| Tier 2 | $12,500 | $30,000 | $75,000 |
| Tier 3 | $20,000 | N/A | $100,000 |
Expiration Date
FINRA doesn’t have a hard policy. However, if you’ll need to cancel or reschedule your exams or appointment, it should be done in a minimum of 10 working days. This is to avoid any extra fees.
However, if by chance you missed your exams and failed to report early, whatever the cost of the exam was, will not be refunded.
Benefits of FINRA
The major benefits of FINRA are those that trade stocks and so these benefits cannot be over-emphasized. One thing is certain: whatever investment they venture into is protected. Let’s look further at how FlNRA protects its investors.
Protects Investors
FINRA protects investors from potential misuse of the market and secures reliable procedures in the financial industry. Its resources such as Brokercheck enables investors to identify if a broker is authentic or crook.
Moreover, they do this by banning brokers that infringe on their code of conduct. In short, their main aim is to avoid financial crimes from occurring. More importantly, FINRA makes its objectives clear and accessible by incorporating them all into an organization.
Critiques About FINRA
Just as any other SRO available, FINRA faces as much criticism as they would. While some investors are pleased with the regulatory system of FINRA, others think that they do not do enough to safeguard their investors.
A study by Egan, Seru, and Mavot showed that there were issues with repeated offenders. Their study also showed that financial offenders with an old past misdeed are most likely to commit more offenses in the future. In their defense, FINRA may have been too restricted in exerting its powers.
The common criticism of all SROs, not excluding FINRA, is that they do just enough to protect the trust of the public. As a result, an innate conflict of interest was created by SROs.
Conflict of Interest
Conflict of interest arises when an individual or entity gets unreliable due to a conflict between their interest or professional responsibilities. In addition, it could lead to a job loss or legal ramifications.
However, if there is an observed conflict of interest, and the individual involved has not acted cruelly, it’s advised to remove that person from the situation in which feasible conflict of interest could arise.
What Is the Difference Between FINRA and the SEC?
Although the aim of FINRA and SEC is to both look after the stock market and protect investors from making bad choices. However, they are both not entirely the same. Let’s look at what makes the SEC different from FINRA.
What Is the SEC?
Securities and Exchange Commission (SEC) is an independent federal government agency in the U.S. In addition, they are in charge of protecting investors, retaining fair and orderly functions of the security market, and promoting capital information.
The SEC was founded in 1934 as the first federal regulator of the security market. They facilitate full public disclosure, safeguard investors from frauds and the many bad practices in the market. Lastly, they also enforce the securities laws that were passed.
Key Differences
The differences between the SEC and the FINRA are:
- The SEC is accountable for ensuring fairness for individual investors, while the FINRA is accountable for supervising almost all U.S brokers and their firms.
- The SEC implements securities laws that have been passed and supervises Finra, while FINRA provides a laid-down rule to supervise securities traders, brokers, and brokerage firms.
Bottom Line
FINRA has been resourceful in protecting the stock market and investors so far. Moreover, if you are determined to trade securities, getting your license from FINRA will do you much good.
However, as an investor, if you are confused as to how to go about getting a license, you could contact a financial advisor. They will help walk you through getting credible brokers and obtaining your license.