Financial Industry Regulatory Authority

Financial Industry Regulatory Authority

In the United States, the Financial Industry Regulatory Authority, Inc., or FINRA, is a private corporation that acts as a self-regulatory organization (SRO). FINRA is the successor to the National Association of Securities Dealers, Inc. (NASD). Though sometimes mistaken for a government agency, it is a non-governmental organization that performs financial regulation of member brokerage firms and exchange markets.




The Financial Industry Regulatory Authority (FINRA) is the largest regulator for all securities firms doing business in the United States. FINRA’s mission is to protect America’s investors by making sure the securities industry operates fairly and honestly. All told, FINRA oversees nearly 4,540 brokerage firms, about 163,675 branch offices and approximately 631,725 registered securities representatives.[1]

FINRA has approximately 3,000 employees and operates from Washington, DC, and New York, NY, with 20 regional offices around the country.[citation needed]

FINRA has 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 enforcement arm of the New York Stock Exchange, NYSE Regulation, Inc., and the NASD. The merger was approved by the United States Securities and Exchange Commission (SEC) on July 26, 2007.[2]

The opinion of NASD is that the regulatory consolidation will "increase efficient, effective, and consistent regulation of securities firms, provide cost savings to securities firms of all sizes, and strengthen investor protection and market integrity." According to NASD, additional benefits are to "streamline the broker-dealer regulatory system, combine technologies, and permit the establishment of a single set of rules and a single set of examiners with complementary areas of expertise within a single SRO."[3]

With respect to the regulatory agency merger, SEC Chairman Christopher Cox said, "The consolidation of NASD's and NYSE's member firm regulatory functions is an important step toward making our self-regulatory system not only more efficient, but more effective in protecting investors. The Commission will work closely with FINRA to eliminate unnecessarily duplicative regulation, including consolidating and strengthening what until now have been two different member rulebooks and two different enforcement systems."[4]


The NASD was founded in 1939, and 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 NASDAQ 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). See SEC Release No. 34-56145

Board of Governors

The FINRA By-Laws provide that the FINRA Board must consist of the Chief Executive Officer of FINRA, the Chief Executive Officer of NYSE Regulation, eleven Public Governors and ten Industry Governors, including a Floor Member Governor, an Independent Dealer/Insurance Affiliate Governor, an Investment Company Affiliate Governor, three Small Firm Governors, one Mid-Size Firm Governor, and three Large-Firm Governors. The Small Firm Governors, Mid-Size Firm Governor, and Large-Firm Governors are elected by members of FINRA according to their classification as a Small Firm, Mid-Size Firm or Large Firm.[5]

Functions: Regulation and licensure

FINRA regulates trading in equities, corporate bonds, securities futures, and options, with authority over the activities of more than 5,100 brokerage firms, approximately 173,000 branch offices, and more than 676,000 registered securities representatives. 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.

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.


FINRA has a staff of nearly 3,000 and received 2009 revenues of US$755 million.[6] FINRA is funded primarily by assessments of member firms' registered representatives and applicants, annual fees paid by members, and by fines that it levies. The annual fee that each member pays includes a basic membership fee, an assessment based on gross income, a fee for each principal and registered representative, and charge for each branch office.


According to a study by Deborah G. Heilizer and Brian L. Rubin, both partners in Washington with Sutherland Asbill & Brennan LLP, regulators with NASD and NYSE Regulation (now collectively known as FINRA) obtained supersized fines (i.e., fines over US$1 million) in 35 actions taken in 2005. In 2006, that number dropped to 19. And the number of enforcement actions over US$5 million also fell. In 2005, there were seven such actions as opposed to three in 2006. According to the written report, the “data suggest that securities regulators may have retrenched their efforts to regulate through the use of novel theories.”[7]

FINRA levied fines against financial firms totaling US$40 million in 2008, according to a Wall Street Journal analysis. That was the third straight annual decline in fines levied by FINRA or one of its predecessor agencies. The total was 73% below the US$148.5 million in fines collected in 2005.[8] According to FINRA, the fines levied in 2009 were nearly $50 million.[9]

In March 2010, Project on Government Oversight (POGO), a non-profit watchdog organization, wrote a letter to Congress criticizing FINRA and other self-regulatory organizations for what POGO described as a failure to adequately regulate the financial sector. POGO claimed that FINRA and other SROs are unable to regulate effectively due to their close ties with the securities industry that they are supposed to regulate; for example, Bernard Madoff was vice-chairman of NASD, FINRA's predecessor, while he was running his ponzi scheme, his son was on the National Adjudicatory Council whose job it was to review FINRA's disciplinary decisions, and his niece was a member of a compliance advisory committee of FINRA. POGO also attacked FINRA's multi-million dollar executive compensation packages, failure to warn other investors about the imminent collapse of the auction rate securities market despite having liquidated its own investment in the market, spending of large amounts of money and resources on advertising and campaigning in an attempt to gain more power, and the higher transaction costs to investors that are created when an industry regulates itself.[10][11]


The Financial Industry Regulatory Authority (FINRA) operates the nation's largest arbitration forum for the resolution of disputes between customers and member firms, as well as between brokerage firm employees and their firms. (This function was performed by the National Association of Securities Dealers (NASD) up until 2007 when the NASD merged with the New York Stock Exchange's regulation committee to form FINRA) 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, U.S. courts have often found them to be lawful and generally have upheld both the enforceability and result of these arbitrations, except in the case of class actions. [12]

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. [13]

In 1987, in Shearson/American Express v. McMahon, the United States Supreme Court ruled that account forms signed by customers requiring arbitration for disputes were enforceable contracts. Brokerage firms now require all customers to sign such documents, requiring binding arbitration.

For disputes over $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[14]. 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 10 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 10-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. [15] [16].

According to FINRA, there were 5,680 cases for arbitration filed in 2010, a decrease from the of 7,137 cases filed in 2009. The percentage of cases where customers are awarded damages has risen slightly from 42% in 2008 to 47-48% in 2010 and 2011. [13] FINRA rates any positive award to a customer as a win for the customer regardless of the magnitude of losses or legal fees.[17]

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.[18] 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."[17]

Perhaps amidst speculation that Congress was contemplating passing legislation [19] preventing mandatory arbitration clauses, FINRA announced in July of 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). [20] After reports of early success with the pilot program, including an early indication that panels were granting awards to investors 61% of the time under the pilot program versus 48% of the time under the traditional rules, [21] FINRA announced it would be making the program permanent. [22]

See also


  1. ^ [1]
  2. ^ Johnson, Carrie. "SEC Approves One Watchdog For Brokers Big and Small". The Washington Post. July 27, 2007. Page D02. Retrieved October 21, 2008.
  3. ^ "Order Approving Proposed Rule Change to Amend the By-Laws of NASD to Implement Governance and Related Changes to Accommodate the Consolidation of the Member Firm Regulatory Functions of NASD and NYSE Regulation, Inc.". U.S. Securities and Exchange Commission. 2007-07-26. Retrieved 2007-10-09. 
  4. ^ "SEC Gives Regulatory Approval for NASD and NYSE Consolidation". U.S. Securities and Exchange Commission. 2007-07-26. Retrieved 2007-10-09. 
  5. ^ "Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change Relating to the FINRA Regulation Board Composition and Conforming Changes to the FINRA Regulation By-Laws". Security and Exchange Commission. May 21, 2009.  (Release No. 34-59962; File No. SR-FINRA-2009-020)
  6. ^ About FINRA
  7. ^ "'Supersized’ fines on the wane, study says", Investment News, October 3, 2007
  8. ^ Randall Smith, Tom McGinty, and Kara Scannell (January 15, 2008). "Obama's Pick to Head SEC Has Record Of Being a Regulator With a Light Touch". Wall Street Journal. 
  9. ^ 2009 FINRA Year in Review, available at
  10. ^ "Watchdog Group Warns About Wall Street Oversight." The Huffington Post. April 25, 2010
  11. ^ McTague, Jim. (March 8, 2010) "Finra, First Heal Thyself." Barron's.
  12. ^
  13. ^ a b FINRA Statistics
  14. ^
  15. ^ 'FINRA Arbitration Rule 12403'
  16. ^
  17. ^ a b Is This Game Already Over? Critics Say Arbitration Panels Often Have Hidden Conflicts, Gretchen Morgenson, New York Times, June 18, 2006
  18. ^ NASD Frequently Asked Questions, "Do I need a lawyer for arbitration?"
  19. ^ Wisconsin Senator Feingold on the Arbitration Fairness Act of 2007
  20. ^ FINRA News Release 'FINRA to Launch Pilot Program to Evaluate All-Public Arbitration Panels'
  21. ^ Wisconsin Securities Fraud
  22. ^ FINRA News Release 'SEC Approves FINRA Proposal to Give Investors Permanent Option of All Public Arbitration Panels

External links

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