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What does FINRA do?

Our customers often ask us questions like “What does FINRA do?,” “Who is FINRA?,” and “What are the benefits of FINRA?” Well, in this guide, we’ve answered all these key questions and more.

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March 25, 2022
Blog Post

From AML to KYC, the world of identity verification is filled with acronyms. Today, we’re going to help you decode one of the most common: FINRA. 

Here at Veriff, our customers often ask us questions like “What does FINRA do?”, “Who is FINRA?”, and “What are the benefits of FINRA?” Well, in this guide, we’ve answered all these key questions and more. Plus, if you’re subject to FINRA oversight, we’ve also outlined how we can help you satisfy FINRA rules. 

Who is FINRA?

FINRA is the Financial Industry Regulatory Authority. It’s a government-authorized not-for-profit organization that oversees U.S. broker-dealers. The organization states that its mission is “to safeguard the investing public against fraud and bad practices.”

FINRA was created as the result of the consolidation of the National Association of Securities Dealers (NASD) and the member regulation, enforcement, and arbitration operations of the New York Stock Exchange (NYSE) in 2007. The idea behind the creation of FINRA was that overlapping and redundant regulations could be eliminated, while costs and complexity of compliance could also be reduced.

Today, FINRA is authorized by Congress to protect America’s investors. The organization is responsible for making sure that the broker-dealer industry operates both fairly and honestly. As a result, it analyzes billions of daily market events and oversees more than 624,000 brokers across the country.

What FINRA does

At Veriff, one of the most-common questions we’re asked is “what does FINRA do?” Well, put simply, FINRA plays a crucial role in ensuring the integrity of America’s financial system.

Working under the supervision of the Securities and Exchange Commission (SEC), FINRA:

  • Writes and enforces rules governing the ethical activities of all registered broker-dealer firms and registered brokers in the U.S.
  • Examines firms for compliance with those rules
  • Fosters market transparency
  • Educates investors

The main aim of FINRA remains to protect the public against fraud and bad practices.

FINRA’s five steps to protecting market integrity

FINRA says that it pursues its mission in five important ways. In doing so, it aims to enable a fair, balanced, inclusive market where everyone can invest with confidence. Its five steps to protecting market integrity are:

1.    Deter misconduct by enforcing the rules

FINRA writes and enforces rules and regulations for every single brokerage firm and broker in the United States. That includes requiring that all brokers: 

  • Are licensed and registered with FINRA
  • Pass their qualification exams
  • Satisfy continuing education requirements

FINRA also makes sure that broker-dealers comply with its rules and the rules of the Municipal Securities Rulemaking Board. This process is overseen by hundreds of financial examiners who are out in the field every single day. 

On top of this, FINRA also reviews all broker advertisements, websites, sales brochures, and other communications to make sure brokers present information in a fair and balanced manner.

2.    Detect and prevent wrongdoing in the U.S. markets

Using technology and data-gathering techniques, FINRA detects insider trading and strategies firms and individuals are using to gain an unfair advantage. To build a complete picture, FINRA analyzes up to 75 billion transactions every day.

3.    Discipline those who break the rules

If brokers break the rules, FINRA can fine them, suspend them, or bar them from the industry. In the past, FINRA has issued fines of more than $1 million.

4.    Educate and inform investors

FINRA also provides investors with tools and resources that can help them make wise financial decisions. The FINRA website offers dozens of free resources about investing and avoiding fraud, including online calculators and investor alerts.

5.    Resolve securities disputes

When a problem arises between a broker and an investor, FINRA administers the largest dispute resolution forum in the country for the securities industry. It handles nearly 100% of securities-related arbitrations and mediations from 69 hearing locations, including at least one in all 50 states, and Puerto Rico.

FINRA regulations

FINRA enacts rules and publishes guidance for securities firms and brokers. To ensure that broker-dealers and investors alike have confidence that they’re operating on a level playing field, a number of interested parties are involved in rulemaking deliberations.

FINRA’s rulebook is available on the organization’s website. Its regulatory updates, as well as the organization’s long-standing policies, are extensive and are updated frequently. 

Here we'll touch on the FINRA regulations that relate to anti-money laundering (AML) and know your customer (KYC) programs. We’ll also briefly discuss how they are relevant to us.

FINRA members are expected to maintain AML and KYC programs that comply with the United States Bank Secrecy Act and the U.S. PATRIOT Act.

Under FINRA Rule 2090, member firms must use reasonable diligence when opening accounts to know the essential facts concerning the customer and the authority of each person acting on behalf of the customer.

Similarly, as in other financial services sectors, relationships between FINRA members and their third-party contractors (such as us) are subject to FINRA rules. As part of this, member firms are expected to:

  • Maintain vendor management programs that set standards for outside vendors
  • Understand the vendor relationship including the services provided, risks, and risk mitigation
  • Perform periodic monitoring and testing of the vendor

On top of this, any data or records provided to or maintained by the third-party vendor must be consistent with record-keeping requirements that are applicable to the FINRA member firm.

Here at Veriff, we’re not a U.S. investment broker-dealer. As a result, we’re not a member that’s subject to FINRA oversight. However, we do provide services that FINRA members can use to satisfy FINRA rules. In addition, the relationship between any FINRA member and Veriff is governed by FINRA rules.

With the help of our identity verification solutions, you can prove that you’re exercising ‘reasonable diligence’ when verifying the identity of an individual or persons acting on behalf of non-individual customers.

Benefits of FINRA

FINRA provides multiple benefits for both brokers and investors. The organization works every day to ensure that everyone can participate in the financial markets with confidence.

Overall, FINRA aims to ensure that:

  • Every investor receives the basic protections they deserve
  • Anyone who sells a securities product has been tested, qualified and licensed
  • Every securities product advertisement is truthful and not misleading
  • Any securities product sold to an investor is suitable for that investor's needs
  • Investors receive complete disclosure about the investment product before purchase

In 2020 alone, FINRA:

  • Brought 808 disciplinary actions against registered brokers and firms for unethical behavior
  • Levied $57 million in fines
  • Ordered $25.2 million in restitution to harmed investors
  • Referred more than 970 fraud and insider trading cases to the SEC and other agencies for litigation and/or prosecution

Support for compliance with FINRA guidelines 

Here at Veriff, we can support your efforts to comply with FINRA’s rules. As well as helping you verify the identity of an individual that’s attempting to access your services, we can also demonstrate that you have a complete understanding of the Veriff service, risks, and risk mitigation. On top of this, if it’s required, we can also prepare regular client-specific test results.

Our service agreements accurately detail the record-keeping and data retention requirements that apply to our service. Plus, we also take steps to apply those requirements to your data. In addition to this, we may also support your efforts to comply with vendor management rules.

Book a consultation with Veriff

Here at Veriff, we offer a product and service that allows FINRA members to meet a key element of their KYC due diligence requirements.

On top of this, we also offer support services that allow FINRA members to demonstrate compliance with outsourcing rules.

If you’d like to learn more about how we can help you meet KYC requirements and comply with FINRA’s rules, then book a free consultation with Veriff today. We’d love to give you a personalized demo that shows exactly what we can do for you.