An In-depth Look at FINRA’s Oversight of The Investing Industry

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One of the major duties associated with working in the investment world is navigating the many laws governing proper market practices. Each of the regulatory bodies involved in the field has its own purview and regulations. This class of organization includes the Financial Industry Regulatory Authority (FINRA), which is a nonprofit authorized by Congress to ensure investors, brokers, and stock traders act responsibly and equitably.

Though there have historically been multiple organizations tasked with oversight of the stock market, FINRA itself is a relatively recent creation. Becoming acquainted with the regulators within the investment sector is an important element of the curriculum in financial degree programs, especially those with a stock market focus. The following is an overview of FINRA rules and regulations, as well as the history of this body and its role in investing.

FINRA history

While FINRA was founded in 2007, its precursor organizations stretch back to the first half of the 20th century. The National Association of Securities Dealers, founded in 1939, was an early oversight group designed to prevent abuse of the U.S. stock exchange. According to SmartAsset, the creation of NASD was predicated by the stock market crash of 1929 and the Great Depression that followed.

NASD ended up founding its own stock market in 1971, namely NASDAQ. Investopedia explained that the two bodies became separate from one another during a restructuring in 2000. The NASD’s responsibilities then passed to a new body in 2007. This organization, authorized by Congress but not technically part of the federal government, is the Financial Industry Regulatory Authority. SmartAsset noted that the current role of FINRA is taken from the previous activities of both NASD and the New York Stock Exchange’s internal regulatory group.

FINRA regulations

FINRA in its current role ensures investors and entities operating in the stock market follow rules and regulations, creating enforcement mechanisms and assigning punishments to those who commit violations. FINRA inspects securities products to ensure investors know what they’re getting, and that buyers are making suitable investments. Transparency and fairness are the main concepts at the center of FINRA’s mission. The following are the specific ways the organization reinforces these priorities.

Anti-fraud and rule enforcement efforts

Brokers on today’s U.S. stock markets need FINRA licensing to operate. Furthermore, the nonprofit organization is in charge of qualification tests and continuing education rules for brokers. FINRA employs examiners who check on brokers’ activities and review the ways firms advertise their products to individual investors. In addition to launching proactive investigations, these personnel can also react to complaints about stock market misconduct.

Fines and other disciplinary actions

Despite not being a government agency, FINRA has the power to issue punishments to firms or individuals who break stock market rules. For example, when brokers make inappropriate trades on their clients’ behalf, running up their own commissions while losing money for unaware investors, FINRA may level charges of fraud. Firms that ignore red flags regarding theft and fraud may also be in line for heavy fines, as could companies that improperly mark up their securities products.

Large-scale fraud detection processes

FINRA takes proactive efforts to stop fraudulent schemes before they do too much harm. It accomplishes this aim by monitoring the stock market with big data analytics technology. The amount of information processed by the organization tops 35 billion transactions on an average day. Using the picture of markets created by this high-level analysis, FINRA takes action against potential offenders, referring suspicious activity to the Securities and Exchange Commission, as well as other bodies.

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Part of FINRA’s mission involves ensuring potential investors have as much information as possible before they get involved in trading. When people know the rudiments of trading, they’ll be better protected against malicious and misleading schemes. Some of FINRA’s offerings for individual investors include reports on brokers and firms registered with the organization, as well as more generalized data availability tools and fraud warning meters. When investors are able to easily spot the signs of fraud, they’re less likely to enter damaging deals.

Dispute resolution

Brokers and investors sometimes enter disagreements about their stock market activities and need a third-party arbiter to step in. This is another of FINRA’s roles. The nonprofit boasts that its dispute resolution forum is the largest of its type, with over 70 locations to hold hearings. Each state has at least one of these facilities, as do London and Puerto Rico. Almost all arbitration and mediation cases from covered areas go through these bodies.

Learning about compliant investing

Becoming familiar with the activities of FINRA and other industry watchdogs is essential for professionals on the way to a high-level position in investing. Northeastern University’s Online Master of Science in Finance offers an investment track where individuals will become familiar with relevant regulators, as well as up-to-date practices that keep individual and corporate clients in compliance at all times. Such legal expertise is a must in the stock market and can increase a graduate’s value to potential employers.

The Analysis of Financial Institutions and Markets course is one of the foundational classes in the Online MSF, designed to give an overview of the way markets work today and the roles of organizations within them. Portfolio Management is concerned with risk-reduction models and the effective management of investment portfolios by individual investors and firms. Investment Banking deals with securities transactions and administration strategies at financial services organizations
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Pursuing Northeastern University’s Online MSF program is a way to obtain essential knowledge about the inner workings of the stock market, whether to pivot into this space or to seek a higher-ranking position in the field. Professionals who select the Investment Finance track learn up-to-date information on the rules and institutions associated with responsible and compliant investing, positioning them to become better advisors for firms and individual investors alike.

To learn more about the Online MSF curriculum and admission requirements, visit the program website.

Recommended Readings:
Corporate finance or investment finance: Comparing the two tracks of the Online MSF at Northeastern University
What is the Bretton Woods Agreement?

Sources
Northeastern University’s Online Master of Science in Finance.
FINRA – About FINRA
FINRA – What We Do
Investopedia – Financial Industry Regulatory Authority (FINRA)
SmartAsset – All About FINRA (Financial Industry Regulatory Authority)