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What It Means to Be Regulated by FINRA

What It Means to Be Regulated by FINRA

Have you ever wondered who protects investors—and how? If you invest, it can pay to know about FINRA, the Financial Industry Regulatory Authority. FINRA is a not-for-profit organization authorized under the federal securities laws and registered with the Securities and Exchange Commission (SEC). Alongside the SEC, FINRA oversees U.S. member broker-dealers and their personnel, including individuals who recommend or sell securities products to the public. FINRA’s mission is protecting you, the investor, and ensuring the integrity of our country’s securities markets.

A broker-dealer firm is in the business of buying and selling securities—stocks, bonds, mutual funds and certain other investment products—on behalf of its customers (as broker), for its own account (as dealer) or both. All broker-dealers that sell securities to the public in the U.S. must be registered with the SEC and be members of a registered securities association (currently, FINRA). FINRA members must meet extensive conduct, operational and financial requirements. FINRA, under the close supervision of the SEC, oversees its member firms’ compliance with these requirements. In addition, individuals who are associated with member firms and who are engaged in the investment banking or securities business must be qualified and registered with FINRA. Other types of financial firms and individuals are not subject to FINRA oversight.

Membership in FINRA requires a significant commitment, including compliance with numerous safeguards designed to protect investors and the integrity of the securities markets. Here are a few aspects of what it means to be regulated by FINRA.

  • Comprehensive Admissions Process for Member Firms
    Before a broker-dealer can do business with the public in the U.S., it must apply to become a FINRA member and undergo a substantive review and approval of its proposed business and supervisory and operational systems. This review process assesses whether the prospective member firm has demonstrated its ability to adhere to SEC and FINRA requirements (including acting in a customer’s best interests when making recommendations) and that its personnel don’t have a history of misconduct that could pose a threat to investors like you. Member firms must follow a similar review process if they seek to make significant changes to their business operations, including an ownership change or the introduction of a new business line.
  • Financial Soundness, Reporting and Oversight Requirements for Member Firms
    Member firms must satisfy specific capital (e.g., money and other assets) requirements, disclose changes in their financial condition, provide periodic financial reports to FINRA and have an annual independent audit. This important framework helps ensure that member firms have sufficient liquid assets at all times to protect customers and creditors in the event of the member firm’s failure and that investor funds and securities are properly safeguarded. In addition, broker-dealers are required to be members of SIPC, the Securities Investor Protection Corporation, which helps customers if the firm fails.
  • Regular Examinations and Enforcement of Member Firm Compliance with Rules and Laws
    FINRA members are subject to frequent inspections. FINRA staff regularly examine member firms to determine compliance with FINRA’s and the SEC’s rules and the federal securities laws—at least every four years and as often as annually, depending on the risk profile of each individual firm. These examinations can cover a range of issues, from a member firm’s understanding of the securities it sells, to how it treats its customers (including whether its recommendations are in its customers’ best interests), to its financial stability. Frequent and thorough examinations are critical to maintaining strong investor protection and often uncover and remedy problems before they can harm investors. FINRA also has an enforcement program that disciplines member firms and their associated persons for violating rules or laws and can order them to pay restitution to investors, suspend them or even ban them from FINRA membership.
  • Registration, Disclosure and Other Requirements for Registered Persons
    For a person associated with a member firm to register with FINRA, the member firm must provide FINRA with extensive background information to help FINRA determine whether the person might present a regulatory risk to investors and the firm. Most of this information is available to individual investors and the public through FINRA BrokerCheck, a free and quick way to access information about a broker-dealer and its registered persons. In addition, registered persons must disclose to their firms their outside business activities, private securities transactions and personal investment account holdings.
  • Testing, Qualifications and Continuing Education for Registered Persons
    To become registered, individuals must pass qualifying exams administered by FINRA and comply with mandatory annual continuing education requirements. These exams help ensure that registered persons have the appropriate knowledge to competently handle the particular securities-related activities they perform.
  • Dispute Resolution
    FINRA operates the largest securities dispute resolution forum in the United States to assist in the resolution of disputes involving customers, associated persons and member firms. FINRA's arbitration forum provides a fair, efficient and economical alternative to litigation, particularly for customers with small claims: cases can be resolved more quickly; the overall costs can be less; and customers may appear without counsel. All FINRA awards are publicly available in a searchable online database. In addition, FINRA actively suspends member firms and associated persons that fail to pay arbitration awards or agreed-upon settlements, which incents payment of awards.

What Matters When Choosing a Financial Professional? 

There has been—and continues to be—a great deal of discussion about the various standards of care that govern different kinds of financial firms. The recommendations that a broker-dealer and its registered persons make to retail customers must be in the customers’ best interests. In addition to this important point, you, as an investor, should consider asking a few key questions of any financial professional you’re deciding whether to work with:

  1. What licenses and registrations do you have? With what regulators are you and your firm registered?
  2. What’s your experience in the securities industry? What are your other qualifications?
  3. Do you or your firm have a legal or disciplinary history?
  4. What investments and services can you provide me? Are there any limits on what you can recommend?
  5. How much will the products and services cost me, both at the outset and over time?
  6. How will I pay for these products and services, and how are you compensated?
  7. Do your fees go up if the value of my investments increases or if I add more money to my account?
  8. How will your recommendations align with my goals?
  9. How often is your firm examined by a regulator? When was the last examination?

You can use FINRA’s BrokerCheck tool to research the background and experience of individuals and firms. BrokerCheck tells you instantly whether a person or firm is registered, as required by law, to sell securities (stocks, bonds, mutual funds and more), offer investment advice or both. It also gives you a snapshot of the person's employment history, regulatory actions and investment-related licensing information, arbitrations and complaints.

When you look up an individual on BrokerCheck, be sure to scroll down to the “Current Registration(s)” section and click through to see the BrokerCheck profile of their brokerage firm. From there, you can access the firm’s “Relationship Summary” (a required disclosure document also known as SEC Form CRS), which will help you independently research some of the questions listed above.

Additional Resources

Most business in the securities industry is conducted fairly, efficiently and in a manner that satisfies everyone involved. But problems can arise. If you believe that an individual or member firm has treated you unfairly, contact the firm to see if you can resolve the issue. If you’re still unsatisfied with the firm's response, you can file a complaint with FINRA.

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