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Financial Industry Regulatory Authority (FINRA)

16 October, 2023

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Regulatory power is not always associated with government bodies, but sometimes it goes beyond that, and it’s where self-regulatory organizations, like the Financial Industry Regulatory Authority (FINRA), step in. The regulatory body oversees brokers and broker-dealer firms in the United States and helps protect US investors from scams and illegal trading practices.

What is FINRA?

The Financial Industry Regulatory Authority is a self-regulatory, Non-Governmental Organization (NGO) that creates and enforces rules governing the conduct and operations of brokers and broker-dealers in the US. FINRA oversees roughly 3,400 security firms, having almost 150,000 branch offices. It includes nearly 612,000 registered security professionals as of 2021. The regulatory authority has 19 offices in the US with a team of roughly 3,600 employees.

FINRA enjoys enforcement power over the brokers and companies it regulates. The regulatory body can impose sanctions and fines against those breaching its laws. Such sanctions may cause suspensions and sometimes bans from the industry.

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​​Key Departments of FINRA 

FINRA’s key departments include:

  1. Member Regulation Department: Its responsibility is to ensure that all members abide by industry laws and regulations.
  2. Market Regulation Department: It tracks trading activity in US equities and fixed-income sectors through surveillance, investigations, and analysis.
  3. Enforcement Department: This department checks for potential misconduct and takes disciplinary measures when required.
  4. Transparency Services Department: The unit is tasked to create and update databases with the latest and recorded market information to facilitate investors in making informed decisions regarding securities trading.
  5. Registration and Disclosure Department: This unit offers testing and registration services to securities industry employees.
  6. Dispute Resolution Department: It runs a conflict resolution unit for investors, investment companies, and their registered staff.

FINRA’s regulatory operations are as under:

  1. The Office of Fraud Detection and Market Intelligence: It collects and shares precise market information related to securities not traded on any exchange.
  2. The Office of General Counsel: It investigates any potential misbehavior and sends out necessary disciplinary measures whenever required.
  3. The Office of Invest Education: It offers investors educational resources and economic tools.
  4. Advertising Regulation: Its goal is to monitor advertising material to protect investors from misleading information.
  5. Corporate Financing: It prevents fake business offerings and unjust underwriting compensation.

An Overview of the Fines Imposed by FINRA 

The Financial Industry Regulatory Authority’s enforcement powers allow it to take disciplinary actions against individuals or firms found to be violating industry rules. FINRA has the authority to refer specific cases to different government bodies for prosecution, like the Securities and Exchange Commission (SEC).

Firms found breaching FINRA AML rules can face hefty fines from the authorities. For instance, companies in the United States were fined $68 million in 2018, $65 million in 2017, and $176 million in 2016. These fines show how important FINRA compliance is and the severe effects of not fulfilling these obligations.

One example of the FINRA AML fine is Interactive Brokers LLC. This financial services company was charged $15 million in 2020 for several failures in its anti-money laundering program for five years. As a part of the settlement, the Financial Industry Regulatory Authority mandated the firm to engage an independent advisor to address the program’s shortcomings. The Commodity Futures Trading Commission (CFTC) and the SEC also imposed a total fine of $11.5 million, resulting in a total penalty of more than $38 million.

Anti-Money Laundering with FINRA

The Financial Industry Regulatory Authority has developed AML regulations to facilitate its members in detecting and preventing money laundering. These rules are designed to set minimum criteria for anti-money laundering compliance programs, including client identification and authentication, transaction monitoring, and reporting suspicious activities.

To become FINRA compliant, firms should deploy an AML program approved by the senior management or board of directors. The program should help the business identify and report any suspicious activity, and it must be customized to meet a company’s specific needs.

One of the important elements of an anti-money laundering compliance program is identifying and verifying customers. Businesses should gather accurate and complete data about their clients, including their name, date of birth, address, and other identifying information. Firms should also check the accuracy of collected data using trustworthy and independent sources.

Organizations should implement a Risk-Based Approach (RBA) to all AML processes by performing risk assessments on their clients. A customer’s risk should be evaluated by considering factors like the client’s occupation, location, and transaction history.

The Financial Industry Regulatory Authority mandates its members to provide training to AML compliance officers. This is to ensure that the team has the skills and knowledge necessary to identify and mitigate the risk of money laundering. AML compliance officers are responsible for analyzing client transactions and reporting suspicious activities to the relevant body.

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