Financial Industry Regulatory Authority (FINRA) is a self-regulatory organization (SRO) that operates as a nonprofit government agency. It was established in 2007 through the consolidation of the National Association of Securities Dealers (NASD) and the regulatory functions of the New York Stock Exchange (NYSE).
FINRA is responsible for regulating and overseeing the activities of more than 4250 brokerage firms in the United States, as well as the approximately 630,000 registered securities representatives associated with those firms. It seeks to protect investors and ensure market integrity by promoting fair and ethical practices in the securities industry.
FINRA establishes and enforces rules that govern the conduct of its member firms and their associated persons, investigates potential violations of securities laws and regulations, and enforces disciplinary actions against firms and individuals found to have violated FINRA rules or other securities regulations.
FINRA also provides investor education and tools to help individuals make informed investment decisions, such as the BrokerCheck service, which allows investors to check the background and registration status of a brokerage firm or individual broker. Overall, FINRA plays a crucial role in maintaining investor confidence and promoting fair and efficient markets in the United States.
Roles of Financial Industry Regulatory Authority
FINRA, as a nonprofit government agency, was created to protect investors and ensure market integrity. It is responsible for regulating and supervising more than 4,250 brokerage firms in the United States, making it one of the largest independent regulators of securities firms in the world.
FINRA's primary role is to audit the qualifications of brokerage firms. This includes verifying that the firm and its employees have the necessary licenses and qualifications to perform their duties. By doing so, FINRA helps to ensure that only qualified professionals are involved in the financial industry, which reduces the risk of fraud and other illegal activities.
Another important role of FINRA is to protect the integrity of the market. This includes monitoring and regulating securities transactions to ensure that they are conducted in a fair and transparent manner. FINRA also has the authority to investigate and prosecute individuals and firms that engage in fraudulent or unethical practices, such as insider trading or market manipulation.
In addition to protecting the integrity of the market, FINRA also works to raise awareness among investors and protect their rights. This includes providing educational resources to help investors make informed decisions about their investments, as well as investigating complaints and taking action against firms or individuals who violate securities laws.
FINRA is also responsible for ensuring that brokerage firm employees have the necessary licenses and qualifications. This includes enforcing the licensing requirements for individuals who work in the securities industry, such as brokers and financial advisors. By doing so, FINRA helps to ensure that only qualified professionals are involved in the financial industry, which reduces the risk of fraud and other illegal activities.
Furthermore, FINRA plays an important role in reducing financial crime risks in the investment sector. It works to prevent many financial crimes by banning brokers who violate the code and by investigating and prosecuting individuals and firms that engage in fraudulent or unethical practices. FINRA also works closely with law enforcement agencies to detect and prevent financial crimes, such as money laundering, terrorist financing, and other illegal activities.
Finally, the FINRA Customer Due Diligence (CDD) rule needs to be applied, requiring companies to identify legal entity clients' beneficiaries, understand client accounts' nature and purpose, and continuously monitor client accounts. This rule is designed to prevent financial crimes by ensuring that companies have a comprehensive understanding of their client's business activities and transactions. By doing so, FINRA helps to prevent money laundering, terrorist financing, and other illegal activities that can harm investors and destabilize the financial system.
Anti-Money Laundering with FINRA
FINRA has developed a set of AML rules and regulations to help its members detect and prevent money laundering activities. These rules and regulations are designed to establish minimum standards for AML compliance programs, including the identification and verification of customers, the monitoring of transactions, and the reporting of suspicious activities.
To comply with FINRA's AML regulations, companies must implement an AML compliance program that is approved by senior management or the board of directors. The program should be designed to enable the company to detect and report suspicious activities, and it should be tailored to the company's specific risks and circumstances.
One of the most critical elements of an AML compliance program is customer identification and verification. Companies must collect accurate and complete information about their customers, including their name, address, date of birth, and other identifying information. Companies must also verify the accuracy of this information using reliable and independent sources.
Companies must implement a risk-based approach to all AML control processes by applying risk assessment to their customers. The risk assessment should be based on factors such as the customer's location, occupation, and transactional history.
FINRA also requires its members to train AML compliance officers to ensure that they have the knowledge and skills necessary to detect and prevent money laundering activities. These AML compliance officers are responsible for analyzing customer transactions and reporting suspicious activities to the appropriate authorities.
FINRA AML Fines
FINRA's enforcement authority allows them to take disciplinary action against companies or individuals that are found to be in violation of industry rules. They have the power to refer certain cases to other government agencies for prosecution, such as the Securities and Exchange Commission (SEC).
Companies found in violation of AML regulations can face hefty fines from FINRA. For instance, in 2016, companies in the US were fined a total of $176 million, followed by $65 million in 2017 and $68 million in 2018. These fines highlight the importance of compliance with AML regulations and the severe consequences of failing to meet these obligations.
One recent example of a FINRA AML fine is Interactive Brokers LLC, which was fined $15 million in August 2020 for widespread failures in its AML program over a period of five years. As part of the settlement, FINRA required the company to engage a third-party advisor to assist in remedying the program's deficiencies. The SEC and the Commodity Futures Trading Commission also levied fines totaling $11.5 million, bringing the total amount of penalties to over $38 million.