Financial Industry Regulatory Authority (FINRA): Regulations, compliance, enforcement

Explore FINRA's regulations, compliance requirements, and enforcement mechanisms in this comprehensive guide, providing detailed insights into the organization's role in maintaining the integrity of the U.S. financial markets.

The Financial Industry Regulatory Authority (FINRA) plays a crucial role in the regulation of the financial industry in the United States. This comprehensive guide will explore FINRA's regulations, compliance requirements, and enforcement mechanisms. We will provide detailed information, supported by official sources, to ensure a thorough understanding of FINRA's functions and responsibilities.

Introduction to FINRA

What is FINRA?

The Financial Industry Regulatory Authority (FINRA) is a non-governmental organization that oversees brokerage firms and exchange markets in the United States. It was created in 2007 through the consolidation of the National Association of Securities Dealers (NASD) and the regulatory arm of the New York Stock Exchange (NYSE). FINRA operates under the supervision of the Securities and Exchange Commission (SEC).

FINRA's Mission

FINRA's mission is to protect investors and ensure the integrity of the financial markets. It achieves this by:

  • Writing and enforcing rules governing the activities of broker-dealers.
  • Examining firms for compliance with those rules.
  • Fostering market transparency.
  • Educating investors.

FINRA operates under the authority of the Securities Exchange Act of 1934. The SEC oversees FINRA's activities and approves its rules and regulations.

FINRA Regulations

Rulemaking Process

FINRA's rulemaking process involves several steps:

  1. Proposal: FINRA staff drafts a rule proposal.
  2. Public Comment: The proposal is published for public comment.
  3. SEC Review: After considering public comments, FINRA submits the proposal to the SEC for approval.
  4. Implementation: Once approved by the SEC, the rule becomes effective.

Key Regulations

Suitability Rule (FINRA Rule 2111)

The Suitability Rule requires broker-dealers to have a reasonable basis to believe that a recommended transaction or investment strategy is suitable for the customer. This rule is designed to protect investors from unsuitable recommendations.

Know Your Customer (KYC) Rule (FINRA Rule 2090)

The KYC Rule mandates that broker-dealers use reasonable diligence to know the essential facts concerning every customer. This helps firms understand their customers' financial situations and investment objectives.

Anti-Money Laundering (AML) Rule (FINRA Rule 3310)

The AML Rule requires firms to establish and implement policies and procedures to detect and report suspicious activities. This rule aligns with the Bank Secrecy Act and aims to prevent money laundering and terrorist financing.

Official Sources

Compliance Requirements

Registration and Licensing

Broker-Dealer Registration

All broker-dealers must register with FINRA and the SEC. The registration process involves:

  1. Form BD: Firms must file Form BD with the SEC.
  2. Membership Application: Firms must submit a membership application to FINRA.
  3. Background Checks: FINRA conducts background checks on the firm's principals and associated persons.

Individual Licensing

Individuals associated with broker-dealers must pass qualification exams and register with FINRA. Common exams include:

  • Series 7: General Securities Representative Exam.
  • Series 63: Uniform Securities Agent State Law Exam.
  • Series 24: General Securities Principal Exam.

Continuing Education

FINRA requires registered individuals to participate in continuing education programs. This includes:

  • Regulatory Element: Periodic training on regulatory requirements.
  • Firm Element: Annual training on job-specific topics.

Supervisory Systems

Firms must establish and maintain supervisory systems to ensure compliance with FINRA rules. This includes:

  • Written Supervisory Procedures (WSPs): Documented policies and procedures.
  • Designated Supervisors: Individuals responsible for overseeing compliance.

Recordkeeping and Reporting

Firms must maintain accurate records and report certain information to FINRA. Key requirements include:

  • Books and Records: Firms must keep detailed records of transactions, customer accounts, and communications.
  • Suspicious Activity Reports (SARs): Firms must file SARs with FinCEN for suspicious transactions.

Official Sources

Enforcement Mechanisms


FINRA conducts investigations to detect violations of its rules. Investigations may be triggered by:

  • Customer Complaints: Complaints from investors.
  • Regulatory Filings: Discrepancies in regulatory filings.
  • Surveillance: Market surveillance activities.

Disciplinary Actions

If a violation is found, FINRA can take disciplinary actions, including:

  • Fines: Monetary penalties.
  • Suspensions: Temporary bans on activities.
  • Expulsions: Permanent bans from the industry.

Arbitration and Mediation

FINRA provides arbitration and mediation services to resolve disputes between investors and broker-dealers. These services offer an alternative to litigation.


Arbitration is a formal process where a neutral arbitrator hears both sides and makes a binding decision. It is faster and less expensive than court litigation.


Mediation is an informal process where a neutral mediator helps the parties reach a voluntary settlement. It is a collaborative approach to dispute resolution.

Official Sources

Investor Protection

Investor Education

FINRA offers various educational resources to help investors make informed decisions. These include:

  • FINRA Investor Education Foundation: Provides grants and resources for investor education.
  • Investor Alerts: Warnings about potential scams and fraudulent activities.
  • Tools and Calculators: Online tools to help investors evaluate investments.

Complaint Resolution

Investors can file complaints with FINRA if they believe they have been wronged by a broker-dealer. FINRA investigates these complaints and takes appropriate action.

Official Sources

The Financial Industry Regulatory Authority (FINRA) plays a vital role in maintaining the integrity of the financial markets in the United States. Through its regulations, compliance requirements, and enforcement mechanisms, FINRA ensures that broker-dealers operate fairly and transparently. By protecting investors and fostering market integrity, FINRA contributes to the overall stability and trust in the financial system.

About the author
Von Wooding, Esq.

Von Wooding, Esq.

Lawyer and Founder

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