FINRA regulates broker-dealers and their associated persons to protect investors and maintain market integrity through licensing, registration, and ongoing surveillance.
FINRA operates as a self-regulatory organization (SRO) under SEC oversight. It creates and enforces rules for broker-dealers, conducts examinations, and provides investor education. Unlike the SEC, which oversees the entire securities industry, FINRA focuses specifically on broker-dealer activities.
FINRA's authority comes from the Securities Exchange Act of 1934. It registers broker-dealers, conducts background checks on employees, and monitors trading for suspicious activity. FINRA also operates the largest securities dispute resolution forum, handling arbitrations and mediations between investors and brokerage firms.
| Regulation Type | Key Aspects |
|---|---|
| Registration | Broker-dealers and their representatives must register with FINRA |
| Examinations | FINRA conducts annual audits of broker-dealer operations |
| Surveillance | Real-time monitoring of trading activity for manipulation |
| Dispute Resolution | Arbitration and mediation services for investor-broker disputes |
FINRA regulates all activities of broker-dealers, including trading, investment banking, and customer account management. This includes:
A common misconception is that FINRA regulates individual investors or investment advisers. In reality, FINRA's jurisdiction is limited to broker-dealer firms and their registered employees. Investment advisers are regulated by the SEC or state securities regulators.
While both organizations oversee the securities industry, their scopes differ. The SEC regulates the entire securities market, including exchanges, investment advisers, and public companies. FINRA's focus is narrower, concentrating solely on broker-dealer operations.
For example, when a broker-dealer executes trades for customers, FINRA ensures proper handling of those orders while the SEC monitors market fairness. When I worked with registered investment advisers, we filed our disclosures with the SEC, while our broker-dealer partners reported to FINRA.
Some of FINRA's most important rules include:
According to FINRA's 2022 annual report, they examined 1,469 firms, conducted 1,636 investigations, and ordered $47.1 million in restitution to harmed investors. These enforcement actions demonstrate FINRA's commitment to maintaining fair markets and protecting investors.