The financial services industry is perhaps the most regulated in the United States, and for good reason. Regulatory agencies play an essential role in maintaining public confidence in the financial system, maintaining a stable and healthy system, and making sure consumers are protected.
When it comes to investing or trusting your investments with a financial professional, the two most important agencies are the Financial Industry Regulatory Authority (FINRA) and the United States Securities and Exchange Commission (SEC). I’ll discuss both of them in turn.
FINRA
FINRA is the largest regulatory agency for securities firms doing business in the United States. In 2016, FINRA oversaw over 4,500 brokerage firms, 160,000 branch offices, and more than 500,000 registered securities representatives, according to Investopedia.
Unlike the SEC, which is an independent agency of the U.S. government, FINRA is a private corporation and acts as a self-regulatory organization of the securities industry. It is a relatively young regulatory body, as it was formed in 2007 after the member regulation, enforcement, and arbitration operations of the New York Stock Exchange, NYSE Regulation, Inc., and the National Association of Securities Dealers (NASD) were consolidated, with approval of the SEC.
FINRA’s main concern is that the U.S. securities industry conducts business in a fair and honest way. However, it also provides a large array of other services, including BrokerCheck. BrokerCheck is a database that consumers can use to research the background and legitimacy of brokers, investment advisors, and financial advisors. FINRA is able to provide this information because of its exhaustive record of individuals and firms in the securities industry. FINRA also regulates the professional training, testing, and licensing of registered brokers.
SEC
As discussed above, the SEC is an independent regulatory agency of the U.S. government. Created by Congress in 1934, its purview includes protecting investors from fraud and maintaining the fair and orderly functions of the securities markets.
Generally, securities products offered through interstate commerce, either through the mail or the internet, must be registered with the SEC. Also, financial services firms, such as broker-dealers and their professional representatives, must be registered with the SEC.
The SEC regulates financial organization and individuals in the securities industry according to established rules. The agency also provides investors with access to documents such as registration statements and financial reports through its electronic database, called EDGAR.
The creation of the SEC was a result of the stock market crash of 1929. The ensuing lack of confidence in the securities industry led to the passage of the Securities Act of 1933 and the Securities Exchange Act of 1934, which created the SEC. This was meant to instill confidence in the industry by scrutinizing the claims, services, and products of securities industry actors.
FINRA and the SEC are only two pieces of the financial regulation puzzle (albeit two very large pieces). Other agencies include the Commodity Futures Trading Commission (CFTC), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board (FRB, the Fed), and a variety of state regulatory agencies. It’s very complex, but the regulation of the financial services is essential to keeping a stable and fair system in place.
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https://www.investopedia.com/terms/f/finra.asp
https://en.wikipedia.org/wiki/Financial_Industry_Regulatory_Authority
