FINRA

The Financial Industry Regulatory Authority (FINRA) is the primary self-regulatory organisation (SRO) for US stock brokers and dealers. While FINRA is a private entity, the SEC delegates much day-to-day supervision to it. FINRA sets conduct rules, tests broker competence, handles customer complaints, and disciplines or expels members who break the rules.

What FINRA regulates

FINRA’s authority covers roughly 3,900 brokerage firms and their registered representatives (stock brokers). It sets rules for how brokers must treat customers, what disclosures they must make, and what conduct is forbidden. FINRA rules include the suitability standard (brokers must recommend investments appropriate to the client’s risk tolerance and financial situation), anti-fraud provisions, trading halts, and capital requirements. FINRA also enforces rules against insider trading, market manipulation, and customer abuse.

Critically, FINRA is not a government agency. It is a private, non-profit membership organisation, funded by member dues and arbitration fees. The SEC grants it authority to regulate, but the SEC retains the power to overrule FINRA rules and to prosecute members for violations. In practice, FINRA does the routine work — exams, minor discipline, customer complaints — while the SEC reserves itself for major enforcement actions and policy.

FINRA exams and continuing education

Every broker and dealer must be licensed by FINRA. This requires passing an exam (Series 7 for general brokers, Series 65 for investment advisers, Series 63 for state compliance). FINRA also requires minimum levels of continuing education — tests every couple of years to keep up with rule changes. Beyond this, FINRA conducts surprise exams of member firms to check for compliance. These exams have evolved toward a risk-based approach: high-volume traders and firms with poor compliance histories are examined more often. A firm that fails an exam can face sanctions, fines, or loss of its license.

The arbitration machine

FINRA operates the largest private arbitration system in the US. When a customer has a dispute with a broker — over a lost account, bad advice, churning (excessive trading), or misrepresentation — the customer can file a claim in FINRA arbitration. An arbitrator (sometimes a panel of three) hears the case and issues a binding award. FINRA arbitration is mandatory for many customer disputes (most brokerage accounts include an arbitration clause) and is faster and cheaper than litigation. However, it is also largely opaque — decisions are not published, appeal rights are limited, and arbitrators are often chosen from lists of retired securities industry figures, which critics say tilts the playing field.

The suitability rule and its evolution

FINRA has long enforced a “suitability” rule: before recommending an investment to a customer, a broker must have a reasonable basis to believe it suits the customer’s financial situation, investment experience, and objectives. For decades, this was the standard for broker conduct. In 2020, the SEC replaced it with a higher standard called “Regulation Best Interest” — brokers must act in the customer’s best interest, not merely suitable. FINRA’s implementation has been contentious; brokers argue that it is too vague, while consumer advocates say it is toothless without robust enforcement.

Enforcement and discipline

FINRA can fine member firms, require restitution, suspend or bar individuals, and expel firms. It also negotiates settlements in which firms agree to pay penalties and promise to improve compliance. FINRA publishes disciplinary actions in a public database (the “BrokerCheck” tool), which lets customers look up a broker’s history. This is one of FINRA’s most useful public services — but many violations go undetected because FINRA’s examiners cannot possibly visit every firm often enough to catch everything.

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