Written by The White Law Group• February 17, 2023• 1:06 pm• Blog, Securities Fraud

What is FINRA? The Financial Industry Regulatory Authority

The Financial Industry Regulatory Authority (FINRA)

FINRA, or the Financial Industry Regulatory Authority, is private corporation that acts as a self-regulatory organization. It provides regulatory services to the financial industry, without the need of taxpayer funding and is not a part of the U.S. Government. The regulator’s entire existence is to regulate the market.

History

Regulating the securities industry has been around much longer than FINRA. The National Association of Securities Dealers, Inc. (NASD) was founded in 1939 and was registered with the SEC (United States Securities Exchange Commission) in response to the 1939 Maloney Act amendments to the Securities Exchange Act of 1934, which allowed it to supervise the conduct of its members subject to the oversight of the SEC. In 1971, NASD launched a new computerized stock trading system called National Association of Securities Dealers Automated Quotations (NASDAQ).

In 2000, NASDAQ underwent a major recapitalization and became an independent entity from NASD. FINRA came about on July 30th, 2007, from the consolidation of the NASD (National Association of Regulatory Authority) and the member regulation, enforcement and arbitration operations of the New York Stock Exchange (NYSE). The merger was approved by the SEC on July 26th, 2007.

Functions of FINRA

FINRA is the referee in the U.S. securities industry. Their mission statement is to provide investor protection and promote market integrity through effective and efficient regulation of broker-dealers.

According to FINRA, they conduct regulatory oversight of more than 3,394 securities firms and 612,457 registered representatives. They are responsible for rule writing, firm examination, enforcement and arbitration and mediation functions, along with all functions that were previously overseen solely by NASD, including market regulation under contract for NASDAQ, the American Stock Exchange, and the International Securities Exchange.

According to its mission statement, FINRA strives every day to ensure that:

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

This means FINRA receives complaints and investigates wrongdoings and takes regulatory action to correct this misconduct.

FINRA Statistics

In 2021 alone, 14,311 investor complaints were received, and 782 new disciplinary actions were filed, according to FINRA statistics. $103 million in fines were assessed and $47 million in restitution was paid to harmed investors. To handle this quantity of complaints FINRA as a workforce of about 3,500 employees in 16 offices across the U.S.

To ensure that the brokerage firms and brokers play by all the rules and regulations, the punishments can range from a simple warning for small offensive to fines and being barred or expelled from the securities industry. In 2021, FINRA suspended 386 and permanently barred another 269 brokers.

FINRA BrokerCheck Tool

FINRA also suspended three brokerage-firms and expelled one. The suspension and fines are all public record, and investors may use this information free of charge at FINRA’s BrokerCheck site. It will hurt these firms’ overall income stream if you do not invest your hard-earned money with the brokers and firms that have had numerous disclosures.

FINRA tries to level the playing field between investors and the industry by educating the everyday investor. Their website is full of information. FINRA BrokerCheck easily allows investors and financial advisors to research any broker or firm they will possibly be dealing with.

All firms dealing in securities that are not regulated by another self-regulatory organization (SRO), are required to be a member firm of FINRA. The regulator confirms every member is licensed and has passed exams to ensure everyone is compliant and up-to-date on the rules and regulations.

FINRA licenses individuals and admits firms to the industry, writes rules to govern their behavior, examines them for regulatory compliance, and sanctioned by the SEC to discipline registered representatives and members firms that fail to comply with federal securities laws and FINRA’s rules and regulation. This organization releases regularly annual Regulatory and Examinations Priorities Letters to disseminate information.

How to Start a FINRA Arbitration Claim

While FINRA conducts regulatory reviews and examinations, if you want to sue your financial advisor or brokerage firm for losses you have to initiate a FINRA arbitration claim. For this, FINRA also administers and oversees what is called the FINRA arbitration process.

To start an arbitration claim using FINRA, you should contact an attorney, like the ones at The White Law Group, and for a free consultation. The attorneys will evaluate your claim and possibly move forward. Depending on how small or large your damages are, you will have to pay a filing fee to FINRA. Once FINRA receives the filing fee, your claim is now active.

The amount of the claim for damages will also determine the number of arbitrators assigned to your claim. If your claim is less than $100,000 you will be assigned one arbitrator, and if the amount exceeds $100,000 you will have three arbitrators, one of which is called the chair. In the next section you will find out who arbitrators are and what it takes to become one.

Arbitrator Qualifications

Richard Ketchum, the FINRA Chairman and Chief Executive Officer stated, “We believe that giving investors the ability to have an all-public panel will increase public confidence in the fairness of our dispute resolution process.”

Anyone who meets the minimum requirements can become a FINRA arbitrator. No previous arbitration, securities, or legal experience is required, only five years of paid work experience and two years of college level credits is required to become an arbitrator.

Arbitrators come from all walks of life. These men and women, that range from retirees to stay-at-home parents, are dedicated individuals serving as independent contractors in the efficient system of dispute resolution. According to FINRA, arbitrators listen to both sides of a securities-related dispute, weigh the facts and render a final and binding decision.

When a location for arbitration is secured, the process for selecting the arbitrators begins. FINRA will issue a list of about 15 arbitrators to both parties to pick from. This selection process is very similar to jury selection, some arbitrators will be struck for cause and others will be picked. Once both parties submit their selected list back to FINRA, they will issue out the actual panel of arbitrators.

FINRA Arbitration vs Court

When you join a brokerage firm, everyone signs an arbitration clause in their new account forms. If a dispute arises, it binds both parties to arbitration versus taking each other to court. There are benefits to having both parties agreeing to arbitration. Court can get very expensive and also very time-consuming. It is in the best interest of everyone involved to resolve the issue in the cheapest, speediest manner possible.

The FINRA arbitration process works differently depending on the size of the claim. Claims involving $100,000 or more require a hearing that both parties must attend in person at one of the 71 hearing locations across the United States, San Juan, Puerto Rico, and London England. In this hearing, there will be three arbitrators and a Chair. The Chair is like a judge, ensuring both sides follow the rules and regulations.

Smaller claims are decided by only one arbitrator. Claims that are less than $50,000 may be decided through a Simplified Arbitration Process. The arbitrator will review all the materials produced by both parties without requiring an in-person hearing.

Mediation can be initiated at any time before arbitration begins and even during an arbitration case before it concludes. It offers a flexible alternative to arbitration. Mediation is an informal process in which a trained, impartial mediator facilitates negotiations between disputing parties, helping them find a mutually acceptable solution. Both parties in a dispute must agree to mediation. FINRA does not require parties to mediate.

Is there “Statute of Limitations” to file a FINRA Claim?

FINRA Rule 12206 Time Limits reads as follows:

“12206. Time Limits (a) Time Limitation on Submission of Claims

No claim shall be eligible for submission to arbitration under the Code where six years have elapsed from the occurrence or event giving rise to the claim. The panel will resolve any questions regarding the eligibility of a claim under this rule.” (Emphasis added)

Since this is currently one of the only pre-hearing Motion to Dismiss that a brokerage firm is permitted by rule to file, the majority of firms will file an eligibility rule if the date of purchase of the investments at issue is more than six years – always taking the position that the “occurrence or event giving rise to the claim” is the date of the purchase of the investment.

However, the White Law Group has successfully argued on several occasions that the “occurrence or event giving rise to the claim” is when the client knew or should have known about their claims.

Recovery of Investment Losses through FINRA Arbitration

The foregoing information, which is all publicly available on FINRA’s website, is being provided by The White Law Group.

The White Law Group is a national securities fraud, securities arbitration, investor protection and securities regulation/compliance law firm dedicated to the representation of investors in FINRA arbitration and mediation claims against brokerage firms throughout the United States.

The attorneys at The White Law Group will represent their clients to their utmost abilities and utilize over 30 years of experience in the industry to help investors.

If you believe you have suffered financial losses due to your investment recommendations, the FINRA attorneys at The White Law Group may be able to help you recover your investment losses. Call 888-637-5510 for your no obligation consolation.

The White Law Group is a national securities arbitration, securities fraud, and investor protection law firm with offices in Chicago, Illinois, and Seattle, Washington.