FINRA | U.S. Financial Regulator

Description and functions of FINRA

FINRA was established in 2007 as a successor to the National Association of Securities Dealers, Inc. (NASD) which had operated since 1939. FINRA’s mandate includes oversight of the OTC market. FINRA belongs to a type of non-governmental self-regulatory organizations. Membership in such SROs is mandatory for every broker that accesses the U.S. exchange markets. The Authority has around 3,600 employees, 20 regional representative offices, and about 704,000 members (4,000 financial organizations and 700,000 brokers). Every day, approximately 42 billion financial transactions go through FINRA’s processing center.

Tasks and purposes of FINRA in the Forex market:

• Issue certificates to corporate market participants.

• Ensure that the law is observed by participants in securities markets, partially including the exchange market.

• Run information campaigns intended to improve the qualifications of professional investors.

• Consider disputes and impose fines in cases of violations.

• Present cases to the SEC when there is evidence of a criminal offense.

• Monitor and audit the NYSE and Nasdaq stock exchanges.

FINRA is a non-government regulator that supervises the OTC market with the consent of NYSE and Nasdaq. Exchanges let FINRA conduct audits because they are interested in resolving disputes between investors and brokers without the participation of a court. FINRA is fully subordinate to the SEC and provides it with all information about exposed violations.

To obtain a FINRA license, a broker has to:

• Disclose information about its executives. The CEO provides detailed information about their family’s property.

• Provide a business plan, development strategy, and a plan of activities for force-majeure cases.

• Provide a trial balance.

• Provide other documents required by FINRA, depending on the type of the broker’s activity. The list may include over 30 documents.

A FINRA certificate confirms a broker’s membership in an independent SRO as per the SEC requirements. FINRA is financed from its members’ contributions and fines paid.

Official website and available information

The website has a convenient structure. Needed information can be located quickly just by following the sections and subsections on the website.

Overview of the FINRA website:

• The upper main menu consists of two parts.



FINRA website

• Central part. Introductory information about the regulator, links to annual reports, etc.



FINRA website

• The Footer repeats the upper menu and contains the site map, links to the regulator’s social media profiles, etc.



FINRA website

Main menu structure:

• About FINRA contains general information: mission, functions, and organizational structure.

• Careers. Jobs with the regulator.

• Brokercheck. Here you can find all public information about the Authority’s licensees.

• Media Center. News, releases, and information about upcoming events.

• Rules & Guidance. Theoretical framework, laws, and rules that govern FINRA’s work. Links to the National Adjudicatory Council and other organizations. Disciplinary actions, guidelines on how to apply sanctions, and a list of barred entities.

• Filing & Reporting. Reporting tools, regulatory information filing system, e-Bill, etc.

• Compliance Tools. Tools for control and cybersecurity.

• For Investors offers information about personal finance, calculators to determine financial results, investment courses for beginners, counteractive methods against fraud, filing complaints, writing to the Securities Investor Protection Corporation (SIPC), etc.

FINRA website

“For investors” provides a theoretical framework and complaint forms. The second most useful section is “Brokercheck” (FINRA clients database).

How to confirm a broker’s license on the FINRA website

FINRA issues certificates without which it’s impossible to obtain a license from the SEC. Direct search by a broker’s legal name allows you to find mentions of the company in articles, reviews, and releases on the FINRA website. This information can be useful for preliminary analysis of the broker before you open an account.

FINRA website

For example, in the screenshot above, the TD Ameritrade broker, well-known thanks to its trading platform Thinkorswim, is mentioned in connection with a fine imposed on it by FINRA in 2013.

To find a broker’s license on the FINRA website, do the following:

• 1

  On the broker’s website, find confirmation that the company is a FINRA member.



FINRA website

If this information is not on the website, it does not mean that the broker is not registered. If you are going to trade in the U.S. market, TU recommends checking every broker on the FINRA website to avoid dealing with blacklisted companies.

• 2

  In the upper menu on the FINRA website’s homepage, select “Brokercheck”. This is a separate resource (database) of the regulator. Here you can find any information about brokers and companies whose shares are traded in the OTC market.



FINRA website

• 3

  Open the “Firm” tab. In the “Name or CRD” field, enter the broker’s full legal name. It is best to take it from the company’s website.



FINRA website

• 4

  Analyze the results.



FINRA website

• 5

  Open the broker’s page. In this case, you need the first page. The second is about clearing and the third is about investing.



FINRA website

Here you will find all information about the broker such as registration with other regulators, states in which the license is valid, types of permitted services, and much more.

FINRA’s basic requirements for brokers

FINRA’s mission is to apply the following three market regulation principles: uphold justice and fair competition; inform investors about their rights and available resources; and enforce the law. The regulators’ tools include the Investor Education Foundation (2003) and a dispute resolution forum divided into platforms for different states. In cases of violations, FINRA can apply disciplinary measures such as imposing fines, obligating offenders to pay damages, and sending information about violations to the SEC.

FINRA’s jurisdiction

FINRA is fully accountable to the SEC and registration with it is mandatory for every stock broker. Like the SEC, FINRA controls the whole OTC market and part of the exchange market. Mandates of the regulators differ:

• The SEC oversees the exchange and OTC market participants. The Commission can open criminal cases and initiate brokers’ bankruptcy. The SEC is mostly focused on forcing offenders to comply with the law.

• FINRA protects the rights of investors and financial service users. It considers issues of compensating clients for financial and moral damage. FINRA is mostly focused on the protection of investors’ interests.

Complaints can be filed by any client (including non-residents of the USA) of a broker that has a FINRA certificate and an SEC license. A complaint can be filed with both regulators simultaneously, but it is better to consult FINRA lawyers first.

Submission and consideration of complaints

Membership in an SRO and a FINRA certificate are mandatory conditions for every licensee of the SEC. For this reason, investors can file complaints with both FINRA and the SEC at the same time. But since it is FINRA that specializes in protecting the rights of private investors, TU recommends filing a complaint with this organization first.

How to file a complaint with FINRA:

• 1

  In the “For Investors” section, select “File a Complaint”.



FINRA website

• 2

  Review the recommendations before filling out a complaint form.



FINRA website

• 3

  Fill out the form.



FINRA website

How to check on a FINRA-licensed broker's legitimacy

Brokers can have an unlimited number of licenses and certificates. Most brokers have licensed representative offices in several regions. In this section, you can find current information on all valid licenses of every broker. Every month, Traders Union’s analysts visit regulators’ websites, checking on the following information:

• Expiry dates of FINRA licenses and the absence of suspensions.

• Lists of services that brokers are permitted to render.

• Warnings or investigations in relation to brokers and their executives.

Save your time by checking on brokers’ licenses on the TU website.

Reviews of FINRA by complaining investors and traders

This section provides additional information about FINRA shared by traders and analysts.

Mikhail, private investor, St. Petersburg

As far as I understand, FINRA supervises all transactions involving shares and bonds that a private individual can buy from banks or investment companies. It means an investor does not need to trade on an exchange and confirm his qualification. He just goes to a bank, opens a securities account, and buys what he wants. I see many benefits in this:

• Investors can buy securities that, for some reason, are not traded on exchanges. Banks get fees and investors get additional earning opportunities.

• Investors can file complaints with banking oversight agencies and the SEC/FINRA. Someone will definitely respond.

This is a good cross-checking system.

Vitaly, analyst and trader, Moscow

I wouldn’t rely completely even on the U.S. regulatory system. I agree that European regulators are far less strict and don’t have such powers as U.S. authorities. But failures happen to everyone. The SEC, for example, failed in the Enron scandal, the dot-com bubble, and WorldCom’s bankruptcy. FINRA had failures as well:

• In 1996, the U.S. Department of Justice and the SEC conducted an investigation in relation to several Nasdaq market makers. It was revealed that the market makers had conspired to set prices of assets for large trades, thereby breaking the principles of fair, competitive, and transparent pricing. FINRA’s predecessor, NASD, was supposed to control the situation, but the regulator’s permissiveness made it possible to manipulate the market.

• In 2010, the Goldman Sachs investment bank became involved in a scandal with violations of investors’ rights. In theory, when acting as a broker, the bank was supposed to protect its clients’ interests. And FINRA’s task was to control it. But the bank did otherwise. It sold its clients' mortgage fund bonds, knowing that the mortgage funds would promote a decline in real estate prices. Buying those bonds was very risky because of the high chance that the issuer would default. The bank cared about its fees, not its clients’ interests. During the proceedings, the bank’s lawyers argued that the clients themselves had decided on buying, and the bank had only generally informed them about the risks. Eventually, the bank agreed to pay one of the largest fines in the history of the U.S. financial system – about $550 million. And the question of how FINRA overlooked it remains unanswered.

Speaking of the dot-com bubble, it’s worth remembering that shares of many IT-startups were traded over the counter as well. It was easier because there were no exchange fees and there was no exchange control. Perhaps at that time, the SEC was paying more attention to securities trading on exchanges. But NASD should have noticed that the prices of securities were too high and the bubble was swelling.

Query. If regulators reveal violations by separate financial system participants but fail to see risks and prevent the collapse of the whole stock market, can you trust them?

Ruslan, trader | Smolensk, Russia

To obtain a FINRA license, the CEO of a company has to provide his fingerprints and declare all property holdings of his family. A licensee must have a plan of activities for emergency situations. Every employee of a company has to take a 12-hour course and pass a proficiency exam. If brokers with offshore licenses went through similar procedures, I think there would be a lot fewer deceived traders.

Yury, trader | Perm, Russia

I wish Russia had a regulatory system like in the USA. Our regulator is the Central Bank that first issues 5 licenses, then revokes them, and then issues them again. And our SROs are simply useless. At first, we had self-regulatory organizations that essentially worked for certain brokers. Membership in such SROs was granted even to binary options brokers, i.e., organizers of casinos! And what do we have now? About 1,000 pyramids and fraudulent companies are revealed every year. And this is just what the Central Bank makes public.

Regulation in the U.S. is a whole other story. The SEC is the highest regulator that partially delegates its powers to the Commodity Futures Trading Commission (CFTC) in the futures market and to FINRA in the OTC market. All brokers are actually cross checked because the SEC periodically inspects the ОТС market participants and FINRA is empowered to find violations on NYSE and Nasdaq. All regulators work consistently and effectively. The SEC imposes fines amounting to several billion USD a year and FINRA imposes $200-300 million a year. And in Russia, we just block websites.

Alexander, trader | Kemerovo, Russia

The U.S. regulatory system is beneficial for traders in that they can consult all authorities simultaneously. If you are a client of a bank or a management company, go to the SEC, FINRA, and an ombudsman. If you trade with a stock broker, go to the SEC, the CFTC, and the National Futures Association (NFA). Someone will eventually respond. Operating under the oversight of all these regulators is hard for brokers. But the U.S. financial system is trusted much more than licenses from European regulators.

About the author of this review

Oleg Tkachenko, Author and analyst at TU

Oleg Tkachenko has been TU’s financial analyst and economic observer since 2016. During this time, he has prepared more than 100 reviews of financial companies and analytic articles on technical and fundamental analysis, as well as developed over 10 proprietary trading strategies. Oleg’s motto is to help everyone come all the way from a novice trader to a professional.