Financial Industry Regulatory Authority (FINRA)

Definition

The Financial Industry Regulatory Authority (FINRA) is a self-regulatory organization that oversees brokerage firms and exchange markets in the United States. Its primary role is to protect investors by ensuring that the securities industry operates fairly and honestly, which is particularly important in preventing practices like insider trading that can undermine market integrity.

5 Must Know Facts For Your Next Test

1. FINRA was established in 2007 as a result of the consolidation of the National Association of Securities Dealers (NASD) and the regulatory functions of the New York Stock Exchange.
2. One of FINRA's main responsibilities is to enforce rules against insider trading and ensure that brokers adhere to regulations designed to protect investors.
3. FINRA conducts regular examinations of member firms to ensure compliance with industry standards and regulations, including those related to trading practices.
4. It provides educational resources for investors to help them understand their rights and how to avoid fraud in the securities markets.
5. FINRA has the authority to impose fines, sanctions, and other disciplinary actions against firms and individuals found in violation of its rules.

Review Questions

• How does FINRA contribute to preventing insider trading within the financial markets?
  • FINRA plays a critical role in preventing insider trading by enforcing strict regulations that require transparency and fairness in securities transactions. It monitors trading activities and conducts investigations into suspicious trades that may indicate insider trading violations. By imposing penalties on firms or individuals who engage in such practices, FINRA helps maintain investor confidence and the integrity of the financial markets.
• Discuss the relationship between FINRA and the SEC in regulating the financial industry.
  • FINRA operates as a self-regulatory organization under the oversight of the Securities and Exchange Commission (SEC), which has ultimate authority over securities regulation. While FINRA enforces its own rules and regulates brokerage firms directly, the SEC ensures compliance with federal securities laws and can intervene if FINRA fails to adequately regulate. This partnership helps create a more robust regulatory framework that addresses various aspects of financial market integrity, including insider trading.
• Evaluate how effective FINRA's measures have been in curbing insider trading incidents since its inception.
  • Since its establishment, FINRA has implemented various measures to curb insider trading, such as increased monitoring of trades, stringent reporting requirements, and educational initiatives for both investors and industry professionals. While it has had notable successes in identifying and penalizing violators, challenges remain due to the evolving nature of trading technology and methods employed by those attempting to evade regulations. The effectiveness of FINRA can be seen through its proactive approach in adapting its strategies to combat new forms of insider trading while also fostering greater awareness among investors about their rights and protections in the market.

Related terms

Securities and Exchange Commission (SEC):

A U.S. government agency responsible for enforcing federal securities laws and regulating the securities industry, including overseeing FINRA.

Insider Trading: The illegal practice of trading stocks or other securities based on material, nonpublic information about a company.

Market Manipulation: An illegal act of artificially inflating or deflating the price of a security to mislead investors and create false market conditions.