Understanding FINRA

Having confidence in who you’re dealing with when investing — whether it’s a financial advisor or brokerage firm — can be daunting. Because of this, organizations exist that place checks and rules on an already complex and nuanced industry to make it safer and easier to navigate for everyone involved.

One of the foremost reputable agencies that oversees and regulates the brokerage and advisory industry is the Financial Industry Regulatory Authority, most often shortened to FINRA. In this article, we’ll highlight the essentials of this organization, including how it formed, what it does, and, specifically, how it regulates the financial industry. We’ll also detail how you can use its lookup tool, BrokerCheck, to verify a professional or firm’s credentials and reputation.

FINRA: Basics and Brief History

The Financial Industry Regulatory Authority (FINRA) is a non-profit regulatory agency based in Washington, D.C. that oversees the actions and operations of broker-dealers, brokerages, and financial advisor firms in the United States. It’s a self-regulatory organization, meaning that it operates independently from the U.S. government. It still, however, falls under the oversight of the U.S. Securities and Exchange Commission (SEC) and maintains approval from Congress to set rules and requirements forth that firms must adhere to.

FINRA is the successor to a similar organization, known as the National Association of Securities Dealers (NASD), which was founded in 1939 following the Maloney Act of 1938. The NASD existed for nearly 70 years and oversaw the creation and administration of Nasdaq until 2007 when FINRA was formed.

What FINRA Does

On its website, FINRA espouses its primary objective of advocating for investors, ensuring that they can safely invest their money and participate in the markets and trade securities without falling victim to fraud or being misled by unscrupulous individuals or organizations. Specifically, it creates rules and takes proactive steps to enforce them, including doling out disciplinary action to firms or people who break their rules or commit fraudulent activities.

To more clearly outline how it proactively regulates the financial industry and its markets, FINRA offers a mission statement of sorts, which it calls the “Five Steps to Protecting Market Integrity.” While we recommend reading the full version on its website for an in-depth look at how it carries out its authority, below is a list of them:

1. Deter misconduct by enforcing rules.
2. Detect and prevent wrongdoing in the U.S. markets.
3. Discipline those who break rules.
4. Educate and inform investors.
5. Resolve securities disputes.

FINRA’s rules exist with the main intention of protecting the integrity of the market and the people who participate in it. They ensure that brokers and broker-dealers play fair when working with customers and employees, and while making transactions. One prominent example is the organization’s suitability standard, which requires broker-dealers to only recommend products that are suitable for their client.

As mentioned in the organization’s set of principles above, FINRA also seeks to educate investors. While it does this in many ways and forms of materials, one particularly helpful mode is the content it serves on its website. Particularly, it provides various articles about the basics of investing and strategies for avoiding fraud and keeping your money safe.

Exams and Certifications It Offers

Before operating as a broker or working in the securities field in the U.S., a firm or individual must register with FINRA. This entails taking rigorous courses of study and passing exams to earn applicable qualifications, certifications, and designations.

The agency offers exams and certifications beginning at the representative level, such as the Series 7, and reaching more specific credentials with a range of other options. The exams all have varying prices and lengths and allow an individual to prove they’re competent in serving in different roles in the finance industry.

In conjunction with the North American Securities Administrators Association (NASAA), FINRA also administers the Series 65 exam for investment advisors. This is a requirement before an individual can work as an investment advisor representative (IAR) at a registered investment advisor (RIA) firm.

Importance of BrokerCheck

One of the most vital tools FINRA offers on its website is BrokerCheck. This allows you to instantly search for an individual or firm that either used to be or is currently registered with FINRA. It also lets you locate individuals and companies registered as investment advisors and provides a link to their listing on the SEC’s Investment Adviser Public Disclosure Database (IAPD).

When you search for a professional or entity on BrokerCheck, you’ll be able to see several key pieces of information:

• Disclosures on their record. This refers to any criminal proceedings, arbitrations, or regulatory actions relating to their activities. You’ll be able to see a breakdown of how many of each they have and access a full report on them.
• States they’re registered in. You’ll be able to view a complete list of each state they’re registered or hold licenses.
• Other organizations they’re registered with. You’ll see any other official organizations, such as the SEC, they hold registrations with.
• Company information. You’ll be able to see information about the firm or person, including their contact address, approval date, and, if applicable, type of corporation and merger and acquisition history.
• Leadership. If you’re searching for a company, you’ll see a full listing of the executive management team and the positions they hold. This can give you enough information to search these people’s records individually.

Distinction from the SEC

While both the SEC and FINRA are important and influential governing bodies in the finance and securities industry, they are not the same. They differ, in large part, based on the type of organization that oversees them and their primary objectives.

The first difference is that the SEC is a government-run entity while FINRA is a self-regulating body detached from the U.S. government. Ultimately, the SEC falls under the jurisdiction of Congress and, because it’s a direct arm of the government, wields a high level of control over market participants.

Another difference between the two is the scope in which they each operate. The SEC’s broad mandate is to protect investors and the integrity of capital markets. While FINRA’s mission is similar, it aims to oversee brokers and broker-dealer professionals rather than investors, advisors, and companies.

Frequently Asked Questions

Who is required to comply with FINRA?

Any person or company that registers as a stockbroker or broker-dealer must comply with the rules and regulations that FINRA has set forth and, therefore, may be subject to discipline it could hand down at its discretion. Per its website, the agency also regulates capital acquisition brokers and funding portals.

How does FINRA oversee financial advisors?

FINRA doesn’t necessarily oversee financial advisors, per se. An advisory professional may have a registration with the agency if they’re also registered as a broker-dealer or work at a financial services company that requires them to handle several job functions, including dealing with securities trades or being an analyst.

FINRA does, however, administer the Series 65 investment adviser exam offered via NASAA. In this way, many prospective advisors may need to go through FINRA’s materials before working in their role.

How can I look up a financial advisor on FINRA?

While not all financial advisors must register with FINRA, you can still look them up using the BrokerCheck lookup tool. If they’re registered with the agency, you can see a detailed report of their disclosures, state licenses, and more (see the section above on the subject). If they aren’t registered, however, they will still show up, but it will only be a link to the SEC’s IAPD website, a similar tool that provides comprehensive information on investment advisors.

Who’s in charge of FINRA?

Robert W. Cook is the president and CEO of the organization and has served in the role since 2016. On the leadership team, he’s joined by 12 other professionals of varying vice president and C-suite roles, with extensive experience in financial regulation and government. Beyond this, FINRA also has a Board of Governors of 23 individuals that hold regular meetings and oversee the agency’s operations.