From the SEC to FINRA, the Financial Industry Regulatory Authority helps protect investors and maintain market integrity by overseeing U.S. broker-dealers (the firms and registered representatives that buy and sell securities for customers).
FINRA is a not-for-profit, self-regulatory organization (SRO) that operates under SEC oversight. In this post, we’ll break down what FINRA is, what it regulates, and how investors can use tools like BrokerCheck to research brokers and firms.
Financial Industry Regulatory Authority Introduction
The operations and activities of financial institutions have evolved significantly. What does the Federal Reserve monitor in the banking system and the broader economy? In banking, regulators focus on “safety and soundness,” including whether banks hold enough capital for the risks they take.
But FINRA is different. The Financial Industry Regulatory Authority (FINRA) oversees broker-dealers. These are securities firms and registered representatives that sell investments and execute trades for customers, instead of regulating banks’ lending or capital requirements.
So where does FINRA come into play? In the securities world: brokerage conduct, supervision, compliance, examinations, and enforcement under SEC oversight.
Banks vs Financial Industry Regulatory Authority
It should be no surprise that the government treats large global banks and small community banks very differently. Since the 2007 financial crisis, the largest banks have received even greater attention.
These large financial institutions either failed or were on the brink of failure. Due to banks’ excessive risk-taking, the government spent large amounts of taxpayers’ money to rescue those institutions.
In turn, this contributed to the global economic downturn that affected all of us. In fact, scrutiny increased everywhere, including the securities market, which includes FINRA.
What Is the Financial Institutions Regulatory Act (FINRA)?
FINRA is an SRO for member broker-dealers that watches firms under federal law. The SEC supervises this organization.
Five Federal Agencies That Regulate the Financial System
FFIEC is primarily responsible for creating and maintaining standards for depository financial institutions. Such institutions include:
- The Board of Governors of the Federal Reserve System (FRB)
- The National Credit Union Administration (NCUA)
- The Federal Deposit Insurance Corporation (FDIC)
- The Office of the Comptroller of the Currency (OCC)
- Consumer Financial Protection Bureau (CFPB)
Once established, it created the Central Liquidity Facility and the Federal Financial Institutions Examination Council (FFIEC).
What Does FINRA Do?
- Writes and enforces rules for broker-dealers
- Examines brokerage firm compliance
- Investigates and disciplines firms and registered representatives
- Provides investor tools like BrokerCheck so you can do your own research on brokers and firms
Central Liquidity Facility Relation to Financial Industry Regulatory Authority
The CLF is a “mixed-ownership government corporation” managed by the NCUA. National Credit Union Share Insurance Fund. The NCUA is responsible for regulating federal credit unions, insuring deposits, and protecting members of credit unions.
In brief, the Central Liquidity Facilities’ main goal is to improve the financial stability of credit unions. It accomplishes this by acting as a liquid lender to credit unions experiencing a shortage of money to lend.
Furthermore, it’s classified as a mixed-ownership corporation, as member credit unions own it. All credit unions over $250 million are CLF or Federal Reserve members, as they’re required to have at least one federal liquidity contingency source. Membership in this facility is voluntary and specific to credit unions only.
Support Offered by the Central Liquidity Facility
- Supporting mortgage and consumer lending by credit unions
- Encouraging savings
- Extending financial resources to all parts of the economy
Federal Financial Institutions Examination Council (FFIEC)
Established on March 10, 1979, The Federal Financial Institutions Examination Council (FFIEC) was added to the Financial Institutions Regulatory and Interest Rate Control Act of 1978.
As a formal US interagency body, it provides standardized methods for examining financial institutions for numerous regulatory bodies. Composed of five banking regulators, its goal is to promote uniformity in the supervision of financial institutions in the United States.
What I like about the Council is that it allows the public to access data about home loans and prices that depository institutions must disclose by law.
In addition, the FFIEC also compiles this data in yearly reports for the public to research information about specific metropolitan and census areas.
Why Does the FFIEC Matter?
For a few reasons.
Firstly, it protects investors from fraud. It accomplishes this by holding companies accountable to regulations established by the Home Mortgage Disclosure Act, the FDIC, the NCUA, and the FRB, among others. Not only does it hold companies responsible, but the standardized forms and principles of the FFIEC ensure uniformity in the auditing process.
Secondly and perhaps more importantly, institutions such as the FDIC or NCUA guarantee investors’ money. Because of oversight from agencies through the collective FFIEC, investors can sleep well at night knowing that guarantees will be honored.
Problems Related to the Regulation of Financial Institutions
” There is a very real danger that financial regulation will become a wolf in sheep’s clothing.”- Henry Paulson, Public Servant
If the level of regulation is too high, free-market forces may no longer be able to work correctly. What ends up happening is that firms might be limited in their business activities. In the long run, this may cause financial institutions to lose competitiveness.
Strict financial regulations may also prevent startups from entering the market. High barriers to entry may turn many investors off. They may not be willing to provide startups in the financial sector with sufficient money.
Additionally, strict regulation may see banks pulling their operations from the US to less-regulated countries. As a result, they might start to engage in high-risk-taking activities again. Because of the interconnectedness of our global financial system, we may see ourselves in the same boat as in the 2007 financial crisis.
Final Thoughts: Financial Industry Regulatory Authority
The Financial Industry Regulatory Authority is a key part of how brokers are regulated. They set standards, scrutinize brokers, and enforce rules under the SEC umbrella.
If you’re ever unsure of any broker, you can use BrokerCheck to look up any broker or firm. You can use them to review fees, terms, and conditions, and see if they have any conflicts with anyone.
Frequently Asked Questions
What Is the Financial Industry Regulatory Authority?
This is a nongovernmental association that makes and enforces rules under SEC oversight that brokers must follow to ensure fair trading.
What Is the Difference Between FINRA and SEC?
The Financial Industry Regulatory Authority regulates brokers under SEC oversight. Although the SEC has broader regulations. They regulate all securities.
Is FINRA a State or Federal Agency?
The Financial Industry Regulatory Authority is neither a state nor a government agency. It is not for profit and works as a private company to regulate brokers under SEC supervision.