Financial Industry Regulatory Authority (FINRA)

Definition

The Financial Industry Regulatory Authority (FINRA) is a self-regulatory organization that oversees brokerage firms and exchange markets in the United States. It is responsible for ensuring fair practices, protecting investors, and regulating the activities of brokerage firms, particularly during critical processes such as Initial Public Offerings (IPOs). FINRA enforces rules and regulations to maintain the integrity of the financial markets and fosters transparency to build trust between investors and market participants.

5 Must Know Facts For Your Next Test

1. FINRA was established in 2007 when the National Association of Securities Dealers (NASD) merged with the member regulation functions of the New York Stock Exchange (NYSE).
2. FINRA's primary goal is to protect investors by ensuring that brokerage firms operate fairly and honestly in their dealings.
3. During an IPO, FINRA reviews the registration statement to ensure it complies with all regulatory requirements before the shares can be offered to the public.
4. FINRA conducts regular examinations of member firms to monitor compliance with its rules, which include standards for conduct during the IPO process.
5. The organization also administers a dispute resolution process for investors who have complaints against brokerage firms, enhancing investor confidence in financial markets.

Review Questions

• How does FINRA ensure compliance among brokerage firms during the IPO process?
  • FINRA ensures compliance among brokerage firms during the IPO process by reviewing the registration statements submitted by companies. It checks for adherence to regulatory requirements to protect investors and maintain market integrity. By conducting these reviews, FINRA helps prevent misleading information from being presented to potential investors, thereby promoting transparency during a critical phase in a company's fundraising efforts.
• In what ways does FINRA contribute to investor protection within financial markets?
  • FINRA contributes to investor protection by implementing regulations that require brokerage firms to act fairly and transparently in their dealings with clients. This includes oversight during events like IPOs, where proper disclosure of risks and financial health is essential. Additionally, FINRA provides resources for investors, such as educational materials about investing and a dispute resolution system for addressing grievances against brokers, thus fostering a safer investing environment.
• Evaluate the role of FINRA in maintaining market integrity and how its functions might evolve with changing market dynamics.
  • FINRA plays a crucial role in maintaining market integrity by overseeing brokerage firms and ensuring compliance with securities regulations. Its functions may evolve with changing market dynamics, particularly as technology advances and new financial instruments emerge. For instance, as more trading occurs online and through algorithmic trading platforms, FINRA might need to adapt its regulations and enforcement mechanisms to address potential issues related to market manipulation or fraud. By staying responsive to these changes, FINRA can continue to protect investors and uphold trust in financial markets.

Related terms

Securities and Exchange Commission (SEC): The SEC is a U.S. government agency that regulates the securities industry and protects investors by enforcing federal securities laws.

Underwriting: The process by which an investment bank evaluates and assumes the risk of issuing new securities for a company, particularly during an IPO.

Market Manipulation: Illegal practices intended to interfere with the free and fair operation of the market, often monitored and regulated by organizations like FINRA.