Financial Industry Regulatory Authority
Encyclopedia
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.
FINRA has approximately 3,000 employees and operates from Washington, DC, and New York, NY, with 20 regional offices around the country.
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.
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."
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."
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
("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.
The NASD, now FINRA, publishes much educational information for the public and has been publishing and disclosing the education and exam requirements for USA based credentials, charters, designations and certifications that are offered by SRO
s Self Regulatory Organizations for about a decade. http://apps.finra.org/DataDirectory/1/prodesignations.aspx
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. According to FINRA, the fines levied in 2009 were nearly $50 million.
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.
s.
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.
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. 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. .
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. FINRA rates any positive award to a customer as a win for the customer regardless of the magnitude of losses or legal fees.
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. 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."
Perhaps amidst speculation that Congress was contemplating passing legislation 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). 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, FINRA announced it would be making the program permanent.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, the Financial Industry Regulatory Authority, Inc., or FINRA, is a private corporation that acts as a self-regulatory organization
Self-regulatory organization
A self-regulatory organization is an organization that exercises some degree of regulatory authority over an industry or profession. The regulatory authority could be applied in addition to some form of government regulation, or it could fill the vacuum of an absence of government oversight and...
(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
Financial regulation
Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system...
of member brokerage firms and exchange markets.
Overview
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.FINRA has approximately 3,000 employees and operates from Washington, DC, and New York, NY, with 20 regional offices around the country.
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
New York Stock Exchange
The New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
, the NASDAQ
NASDAQ
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the second-largest stock exchange by market capitalization in the world, after the New York Stock Exchange. As of...
Stock Market, Inc., the American Stock Exchange
American Stock Exchange
NYSE Amex Equities, formerly known as the American Stock Exchange is an American stock exchange situated in New York. AMEX was a mutual organization, owned by its members. Until 1953, it was known as the New York Curb Exchange. On January 17, 2008, NYSE Euronext announced it would acquire the...
LLC, and the International Securities Exchange
International Securities Exchange
International Securities Exchange Holdings, Inc. is a wholly owned subsidiary of German derivatives exchange Eurex. It is a member of the Options Clearing Corporation and the Options Industry Council . Historically, responsibility for organizing the Options Industry Conference is rotated amongst...
, 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
New York Stock Exchange
The New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
, NYSE Regulation, Inc., and the NASD. The merger was approved by the United States Securities and Exchange Commission (SEC) on July 26, 2007.
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."
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."
History
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 1934Securities Exchange Act of 1934
The Securities Exchange Act of 1934 , , codified at et seq., is a law governing the secondary trading of securities in the United States of America. It was a sweeping piece of legislation...
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
American Stock Exchange
NYSE Amex Equities, formerly known as the American Stock Exchange is an American stock exchange situated in New York. AMEX was a mutual organization, owned by its members. Until 1953, it was known as the New York Curb Exchange. On January 17, 2008, NYSE Euronext announced it would acquire the...
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.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 BoardMunicipal Securities Rulemaking Board
The Municipal Securities Rulemaking Board, often referred to as the MSRB, writes investor protection rules and other rules regulating broker-dealers and banks in the United States municipal securities market, including tax-exempt and taxable municipal bonds, municipal notes, and other securities...
("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
American Stock Exchange
NYSE Amex Equities, formerly known as the American Stock Exchange is an American stock exchange situated in New York. AMEX was a mutual organization, owned by its members. Until 1953, it was known as the New York Curb Exchange. On January 17, 2008, NYSE Euronext announced it would acquire the...
("AMEX") and the International Securities Exchange
International Securities Exchange
International Securities Exchange Holdings, Inc. is a wholly owned subsidiary of German derivatives exchange Eurex. It is a member of the Options Clearing Corporation and the Options Industry Council . Historically, responsibility for organizing the Options Industry Conference is rotated amongst...
("ISE").
NASD, the predecessor of FINRA, founded the NASDAQ
NASDAQ
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the second-largest stock exchange by market capitalization in the world, after the New York Stock Exchange. As of...
("National Association of Securities Dealers Automated Quotations") stock market in 1971. In 2006, NASD demutualized from NASDAQ by selling its ownership interest.
The NASD, now FINRA, publishes much educational information for the public and has been publishing and disclosing the education and exam requirements for USA based credentials, charters, designations and certifications that are offered by SRO
SRO
SRO may refer to* Standing room only, an event in which all seats are occupied leaving only places to stand** Standing Room Only, a number of different works of media** Standing Room Only, a swing band based in Mississippi Mills, Ontario, Canada...
s Self Regulatory Organizations for about a decade. http://apps.finra.org/DataDirectory/1/prodesignations.aspx
Size
FINRA has a staff of nearly 3,000 and received 2009 revenues of US$755 million. 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.Criticism
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.”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. According to FINRA, the fines levied in 2009 were nearly $50 million.
In March 2010, Project on Government Oversight
Project on Government Oversight
The Project On Government Oversight , founded in 1981, is an independent non-profit organization in the United States which investigates and seeks to expose corruption and other misconduct. POGO assists whistleblowers and investigates federal agencies, Congress, and government contractors...
(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
Bernard Madoff
Bernard Lawrence "Bernie" Madoff is a former American businessman, stockbroker, investment advisor, and financier. He is the former non-executive chairman of the NASDAQ stock market, and the admitted operator of a Ponzi scheme that is considered to be the largest financial fraud in U.S...
was vice-chairman of NASD, FINRA's predecessor, while he was running his ponzi scheme
Ponzi scheme
A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation...
, 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.
Arbitration
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 actionClass action
In law, a class action, a class suit, or a representative action is a form of lawsuit in which a large group of people collectively bring a claim to court and/or in which a class of defendants is being sued...
s.
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.
In 1987, in Shearson/American Express v. McMahon, the United States Supreme Court ruled that account forms signed by customers requiring arbitration
Arbitration
Arbitration, a form of alternative dispute resolution , is a legal technique for the resolution of disputes outside the courts, where the parties to a dispute refer it to one or more persons , by whose decision they agree to be bound...
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. 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. .
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. FINRA rates any positive award to a customer as a win for the customer regardless of the magnitude of losses or legal fees.
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. 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."
Perhaps amidst speculation that Congress was contemplating passing legislation 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). 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, FINRA announced it would be making the program permanent.
See also
- Securities and Exchange Commission
- NASDAQNASDAQThe NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the second-largest stock exchange by market capitalization in the world, after the New York Stock Exchange. As of...
- List of finance topics
- Korea Financial Investment AssociationKorea Financial Investment AssociationThe Korea Financial Investment Association is a non-profit, self-regulatory organization in South Korea, founded under the Financial Investment Services and Capital Market Act...
- American Academy of Financial ManagementAmerican Academy of Financial ManagementThe American Academy of Financial Management is a USA-based board of standards, certifying body, and accreditation council dedicated to the finance sector and management professionals....
- Alternative display facilityAlternative display facilityAlternative display facility is an equity trading facility created in the United States by the Financial Industry Regulatory Authority , a self-regulatory organization . The ADF is an alternative to the exchange for publishing quotations and for comparing and reporting trades...
- ACT (Nasdaq)ACT (NASDAQ)ACT, or Automated Confirmation of Transactions, is system for reporting and clearing trades in the over-the-counter and NASDAQ securities markets...
- Securities regulation in the United StatesSecurities regulation in the United StatesSecurities regulation in the United States is the field of U.S. law that covers various aspects of transactions and other dealings with securities...
- List of Securities Examinations
External links
- FINRA website
- U.S. Securities and Exchange Commission home page
- SECLaw.com - Online guide to securities regulation
- Washington Post Article 'SEC Approves One Watchdog For Brokers Big and Small' By Carrie Johnson, Washington Post Staff Writer – Friday, July 27, 2007; D02
- FINRA Dispute Hearing Locations