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. It was established to protect investors by ensuring that the securities industry operates fairly and honestly. FINRA establishes rules and regulations that govern the conduct of its members, monitors trading activities, and provides education to investors about the financial markets.

5 Must Know Facts For Your Next Test

1. FINRA was established in 2007 through the consolidation of the National Association of Securities Dealers (NASD) and the regulatory functions of the New York Stock Exchange (NYSE).
2. It has the authority to impose fines and sanctions on firms and individuals that violate its rules, ensuring compliance with industry standards.
3. FINRA conducts regular examinations of member firms to assess their adherence to regulations and detect any potential misconduct.
4. It also offers a public database called BrokerCheck, allowing investors to research the professional backgrounds of brokers and investment advisors.
5. FINRA plays a critical role in investor education by providing resources and tools that help individuals understand investing and financial products.

Review Questions

• How does FINRA's role as a self-regulatory organization impact the operations of brokerage firms in the financial markets?
  • FINRA's role as a self-regulatory organization impacts brokerage firms by establishing rules and standards that these firms must adhere to while conducting business. This ensures that all members operate fairly, transparently, and in compliance with laws designed to protect investors. By monitoring trading activities and enforcing compliance through examinations, FINRA helps maintain trust in the financial markets, ultimately supporting their overall integrity.
• Evaluate the significance of FINRA's BrokerCheck tool for investors in making informed decisions about their brokers.
  • FINRA's BrokerCheck tool is significant for investors as it provides essential information about brokers and investment advisors, including their professional history, regulatory actions, and disciplinary records. By allowing investors to access this information easily, BrokerCheck empowers them to make informed decisions when selecting a financial professional. This level of transparency promotes accountability within the brokerage community, which is crucial for maintaining investor confidence in financial markets.
• Analyze the potential consequences if FINRA were to lose its authority as a self-regulatory organization within the financial markets.
  • If FINRA were to lose its authority as a self-regulatory organization, it could lead to increased risks within the financial markets due to a lack of oversight and accountability among brokerage firms. Without FINRA's regulatory framework, firms might engage in unethical practices or violate securities laws without facing adequate consequences. This scenario could undermine investor trust, leading to decreased participation in the markets and potential financial instability as investor protection measures would be weakened.

Related terms

Securities and Exchange Commission (SEC):

A U.S. government agency responsible for enforcing federal securities laws and regulating the securities industry, including stock exchanges and brokers.

Broker-Dealer: A person or firm that buys and sells securities on behalf of customers or for its own account, subject to regulation by FINRA.

Self-Regulatory Organization (SRO): An organization that creates and enforces regulations for its members, subject to oversight by a governmental authority, such as FINRA.