Every firm and broker that sells securities to the public in the United States must be licensed and registered by FINRA. Member Regulation (Risk Oversight and Operational Regulation and Sales Practice) regularly examines all firms to determine compliance with FINRA’s rules and those of the SEC and the Municipal Securities Rulemaking Board (MSRB). FINRA’s comprehensive examination program oversees more than 3,900 brokerage firms, more than 160,000 branch offices and nearly 635,000 registered representatives. Member Regulation examines 1,500 to 2,000 firms annually – all firms are examined no less than once every four years – and approximately 800 branch offices each year.
During a routine exam, FINRA uses a risk-based approach focusing on those aspects of a firm’s business that present heightened regulatory risk as well as on certain core areas. FINRA uses enhanced data analytics resulting in examinations with a sharper focus and narrower scope. The cause program also investigates more discrete allegations of customer harm typically directed at individual registered representatives and supervisors. More than 2,500 cause matter allegations are investigated each year for rule compliance in point-of-sale areas such as suitability, excessive and unauthorized trading, and misrepresentation. The Surveillance Program monitors broker-dealer risk management and supervision and is also responsible for the day-to-day surveillance of approximately 3,500 firms.
Another key component of Member Regulation is the Membership Application Program (MAP), which is responsible for reviewing all new firm applications and may approve, deny or grant membership subject to appropriate business restrictions. Among other things, the application review process evaluates a firm’s supervisory system and whether adequate financial and operational systems are in place. MAP follows a similar approval process when existing member firms propose significant changes to their business operations, including ownership changes.
Member Regulation also works closely with FINRA’s Office of General Counsel in policy and rulemaking activities, and collaborates with the Enforcement Department to investigate potential cases of wrong-doing.