The Financial Industry Regulatory Authority: not self-regulation after all

Abstract

The Financial Industry Regulatory Authority (FINRA) is the front-line regulator of broker-dealers in the United States. FINRA is not the self-regulatory organization some imagine it to be. A self-described ‘independent’ regulator, FINRA is a non-governmental, not-for-profit organization that wields considerable control over the daily activities of its member firms, their employees, and the investors they serve. The U.S. Securities and Exchange Commission (SEC) – the governmental regulator of the securities markets – oversees FINRA, but FINRA enjoys considerable independence. On the one hand, its governance structure means that it is not accountable to the industry it regulates in the way an SRO would be. On the other hand, FINRA's broad governmental powers are not paired with the public accountability measures to which governmental regulators are subject. Concerns about FINRA's lack of accountability loom even larger as FINRA seeks to regulate additional facets of the financial markets such as investment advisers and securities markets. Policymakers should reconsider its growing role in light of its lack of accountability to the industry it regulates and to the public it is supposed to serve. The chapter proceeds as follows. Part 1 discusses the history and responsibilities of FINRA and its predecessor the National Association of Securities Dealers (NASD). Part 2 discusses FINRA's current functions. Part 3 sets forth the structure of accountability within which FINRA operates. Part 4 compares the mechanisms by which governmental regulators are held accountable to the public with FINRA's accountability structure. Part 5 discusses recent changes in FINRA's focus and aspirations. Part 6 concludes with a recommendation that FINRA's role in the regulation of the U.S. securities markets be reconsidered in order to achieve more effective and accountable financial regulation. THE EMERGENCE OF FINRA FINRA, which was formed in 2007, was built upon a long tradition of self-regulatory organizations (SROs) in the securities industry. FINRA's predecessor, the NASD, joined the ranks of SROs in the late 1930s. Self-regulating securities exchanges were already the industry norm when Congress created the Depression-era federal securities framework. They regulated member conduct and market activity and set standards for listed companies. The Securities Exchange Act of 1934 (Exchange Act) recognized and relied on exchange SROs, such as the New York Stock Exchange (NYSE), to continue performing these regulatory functions.