Headline: What the Heck is FINRA?

Body:   In the next few blog posts, I thought it might be useful to better understand some of the characters within the “cat & mouse” games within the financial markets.  The mice are the small businesses that are trying to exert maximum advantage within the market without running afoul of the Law.  Don’t underestimate the power of mice:

  1.  There are a lot of them.
  2. Mice have very sharp teeth (really like small tusks.)  In a similar manner, many of these small businesses are run by men and women who are also very sharp, and very aware of their market environment.

The cats are usually the governmental agencies meant to protect citizens from unethical practices.  But in this first entry, I am going to throw you a curve and introduce more of a fox.   Related (closely) to the cat, the fox behaves differently.   In this manner, the organization, FINRA works differently, to obtain a similar objective.

What is FINRA?

The Financial Industry Regulatory Authority (FINRA) is actually a not-for-profit organization and works under the authority of the Securities & Exchange Commission (SEC).  FINRA was created in 2007 when the NASD combined with parts of the NYSE (the regulatory portions.)   It has primary responsibility for rule-making, ensuring that the rules are followed, administers the tests taken by the people who want to be traders, and educate the investors in the General Public.  They are a pretty active organization and brought 808 disciplinary actions, and levied $57 Million in fines in 2020 alone.   They also referred almost 1,000 cases of fraud to the SEC.  It also maintains an online database called BrokerCheck.   Using this database, investors can see if their broker has any outstanding complaints against them.

FINRA sounds great!!  What is the downside?

Critics claim that FINRA doesn’t do enough to protect investors.  They have 2 main arguments against it:

  1.  There are current brokers who have multiple complaints against them.
  2. They do just enough to keep the Public Trust.

I would argue that they are doing enough.   The mandate seems to be to lend transparency to the sometimes-opaque financial markets.   “Buyer Beware”, still applies to the financial markets, and the presence of FINRA gives the investor enough transparency to make their own choices in view of objective facts.   For this reason, I would opine that FINRA is in fact working appropriately.  Even more than this, FINRA operates without a cent from the taxpayers.

What is the difference between FINRA and the SEC?

I have looked into this somewhat, and I think I found it.   Though FINRA can fine members and institute other civil penalties, the SEC is a government agency, and only the SEC can impose criminal penalties.   This is a law enforcement procedure, so it seems reasonable that this task is done by a Federal Government agency.  Importantly, if a business disagrees with a penalty asserted by FINRA their first appeal is with the SEC.

Could I take a FINRA Test and become a broker or trader?

The short answer is probably not.  To take such an exam, your employer has to explain to FINRA your need for licensure.   If they do, FINRA offers a variety of licensure exams, including:

Series 7: The Series 7 General Securities Representative qualification is perhaps the best known, mandatory for Financial Advisors and certain other sales positions.

Series 6: The Series 6 qualification allows the holder to transact business in a much more limited set of investment products than Series 7. These are essentially limited to packaged investment products such as mutual funds and variable annuities.

Series 63 and 66: The Series 63 and Series 66 exams cover state securities regulations, and also may be necessary for most Financial Advisor positions.

Series 65: Series 65 is the Uniform Investment Adviser Law Exam which qualifies the holder to be an investment advisor representative.

The Verdict

FINRA is not a government agency and is therefore often overlooked by most people.   But, what they do is VERY important.    I have the privilege of knowing some of the fine professionals who work there and they take their jobs quite seriously.   In my readings, I think I would liken the financial markets to a pool environment.   There are chairs mounted high over a pool and sometimes the lifeguards are here, but often they are better thought of as the lookouts.  The real lifeguards are often at the pool edge, ready to jump in, if necessary.   FINRA seems to serve the function of lookout, while the SEC serves the function of the lifeguard.   Both are needed, and both are vital to the safety of the public.






Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

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