The increasing need to maintain a fair, transparent, and sustainable securities market for businesses and investors has led to the establishment of regulatory bodies. These regulators work with a policy framework that ensures that sustainability concerns do not create systemic risks for stakeholders within their jurisdiction. One of such regulators working under the supervision of the Securities and Exchange Commission (SEC) in the United States is FINRA. Which ultimately leads to the question - what is FINRA?
The Financial Industry Regulatory Authority (FINRA) was established to ensure the compliance of organizations in the securities business with industry regulations. This independent body also ensures that investors in fungible and tradable financial instruments like stocks and bonds are protected against fraud. With the integrity of the financial system assured, the investing public can trade freely in a more transparent market.
The securities market is continually changing and all stakeholders need to stay up to date on the latest trends. FINRA is working to ensure that exchange system platforms - be it stocks, crypto, NFTs and so on - are streamlined to be more resilient while strengthening corporate governance.
What is FINRA doing for Securities firms?
The market regulation surveillance unit of the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD) were consolidated to form FINRA in 2007. This not-for-profit organization is authorized by the U.S. government to ensure that the broker-dealer industry operates fairly and honestly. They employ innovative measures to provide support for all stakeholders in a group of ways:
1. Establishing and enforcing regulations
There are rules governing financial activities which brokers and dealers are mandated to implement in their anti-money laundering (AML) program. FINRA enacts these rules which offer guidance to players in the securities market, ensuring protection for all stakeholders. A deliberative process involving interested parties and stakeholders within the financial sector keeps all activities fair, minimizing unnecessary liability.
FINRA also provides the necessary tools (compliance tools, calculators and others) that enable industry professionals to understand and interpret its comprehensive rules or AML regulations. Market actors have unlimited access to webinars, FAQs, and newsletters which contain critical information on regulatory compliance. A wide array of regulatory topics including NASD and incorporated NYSE rules are available with interpretive guidance to help identify and mitigate risks.
Another consideration is, what is FINRA doing to root out bad actors in the securities market? FINRA has a set of enforcement priorities for determining when brokerage firms or other stakeholders should face formal disciplinary actions. Not all reports of wrongdoings lead to formal sanctions. If there is no harm to investors and market impact remains close to zero, a cautionary action is issued following a comprehensive investigation. Although this action is not considered formal, it will be taken into account whenever there are issues of misconduct in the future.
2. Compliance Monitoring
The availability of compliance tools enables businesses to meet FINRA regulations. With automated surveillance using advanced technologies, trade data is analyzed to uncover insider trading and other fraudulent activities in the brokerage industry. Therefore, firms have no excuse for lack of compliance with FINRA’s KYC regulations.
Referrals from other regulators or customer complaints could lead to the investigation of a business by FINRA. A regulatory examination is eventually conducted and reports generated, which determines if the case goes to a hearing where a final decision gets issued.
3. Maintaining Market Integrity
FINRA enforces stringent reporting and due diligence requirements to ensure that its members comply with AML regulations. All trade data relating to securities must be represented clearly to facilitate transparency. Websites, advertisements, and other media might convey misleading information that may give one party an unfair advantage, but with FINRA you get first hand information and in details. It is the reason why firms should take AML compliance seriously to avoid sanctions.
4. Licensing To become a player in the securities industry in the United States, firms and their associated persons are expected to register with the Financial Industry Regulatory Authority. Records show that there are over 600,000 registered persons and 3,400 broker-dealer firms regulated by FINRA . Qualification exams were conducted to ensure that these members meet registration and industry standards. And ongoing education programs are in place to ensure AML compliance.
What is FINRA doing for Investors?
Sustainability concerns may force broker-dealers to engage in unethical activities that may harm investors. But what is FINRA doing about it? Investors can file a complaint with FINRA to recover damages or settle disputes. There are comprehensive resources on the FINRA website to educate investors on predicting investment potentials, regardless of their experience levels. Online investment courses with special FINRA tools ensure that underserved citizens enjoy easy access to educational materials that can help them make informed investment decisions. The FINRA toll-free number and specialty helpline for senior citizens are initiatives by the regulatory body to ensure that all investors stay protected in this complex and dynamic world.
When fraud has been committed however, the Financial Industry Regulatory Authority cannot file criminal charges but can partner with other law enforcement officials to ensure fraudsters and compliance defaulters are charged. With compliance monitoring, any entity found conducting fraudulent transactions or activities that violate FINRA regulations are identified.
FINRA maintains a database on firms and individual brokers which makes it easier to track registered entities. The information available on the database can ensure that investors do not fall victim to fraudulent schemes. With enforcement priorities that include obtaining restitution for victims of fraud, FINRA’s data on entities that have a history of violations will promote fairness.
In protecting vulnerable investors and seniors, defaulting firms often get sanctions in the form of fines, after which they may be directed to pay restitution to victims. The sanction guidelines available on the FINRA website offer a better understanding of the disciplinary actions that can be imposed for non-compliance with FINRA regulations. Mediation and arbitration between parties ensure that disputes get resolved without going to court.
What is FINRA doing about Digital Assets Regulation
Digital assets offer investment opportunities since their value rises and falls after the purchase like stocks and other securities. It means that brokers are also subject to FINRA regulations, and are required to register and obtain proper licenses. And victims of financial fraud as a result of inadequate level of due diligence or AML compliance when dealing with coin brokers can file complaints.
Since broker-dealers are expected to have proper certifications, cryptocurrency brokers are also expected to comply with licensing standards. Before making investments in digital assets, verifying the identity of brokers will keep the funds from falling into the wrong hands. With a certified broker that has a good reputation, transactions can be tracked and disagreements settled by regulatory bodies. When there is a breach of contract, registered brokers can be held accountable.
Investors should always remember that FINRA regulates financial entities and not the digital assets or securities that are traded. It implies that cryptocurrency is also not regulated by the Financial Industry Regulatory Authority, just the coin brokers. So, safe practices like looking at the Initial Coin Offering (ICO), terms and conditions of the investment, and verifying the registration status of your broker are recommended. All certified entities must conduct activities in compliance with FINRA regulations to avoid mishandling customer investments.
Brokers should conduct proper due diligence checks to ensure that they do not allow money laundering transactions on their platform. Know Your Customer (KYC) programs with a sophisticated ID verification system can ensure that all activities are conducted under AML regulations. Spotting omissions and irregularities can help businesses avoid AML fines and penalties while maintaining a good reputation. And contracting independent experts with the right tools to identify and track suspicious activities can cut operational costs for brokerage firms.
What is FINRA Membership Requirement?
There are a few steps that must be completed by business entities that want to become FINRA members.
1. Name Reservation: This step involves filling out a Firm Name Reservation Form which can be submitted via email.
2. System Access: Completing the Super Account Administrator (SAA) registration grants access to unlimited resources on the FINRA system.
3. Membership Fees: The required membership fee for each designation is available on the FINRA website.
4. Fill and Submit the SEC’s Form BD: It involves filling out the SEC’s broker-dealer registration form.
5. Submit Additional Documents for Further Verification: This step involves submitting completed Form U4s, for representatives and principals of the firm. A Uniform Branch Office Registration Form (Form BR) for a minimum of 1 branch office location.
6. Fingerprinting: The fingerprints of some key company personnel specified in Rule 17f-2 of the Securities and Exchange Act of 1934 are also required to complete the registration process.
Conclusion
As much as investors are concerned about a breach of contract, brokers do not want to face disciplinary actions that will ruin their reputation. While SEC regulates securities trading, FINRA handles the human aspect which is the broker-dealer practices. Broker-dealers need to maintain fraud prevention practices to ensure that they do not break SEC rules. And the FINRA cybersecurity checklist offers comprehensive details on establishing AML compliant policies.
Since businesses are seeking ways to cut operational costs, a compliance division dedicated to monitoring and identifying suspicious activities would mean more expenses. FINRA also provides a compliance vendor directory for researching companies offering consulting, surveillance, and other compliance-related services. Outsourcing to a third party, just like SEC did with FINRA can guarantee efficiency. It allows you to continue what you do best: which is trading in securities or digital assets.
