FINRA ( Financial Industry Regulator)

The Financial Industry Regulatory Authority Introduction The Financial Industry Regulatory Authority (FINRA), formerly known as the National Association of Securities Dealers (NASD) is an important regulatory body in the United States market as it has many scopes and purposes. The FINRA came about because of the merger of the New York Stock Exchange’s administrative council and the National Association of Securities Dealers. The union of these two regulators into FINRA intended to get rid of overlapping regulation as well as wasteful expenses or inefficient costs (Peirce, N.p). At its starting point, FINRA was referred to as SIRA which is the abbreviation for the Securities Industry Regulatory Authority. There were various grievances on the grounds that the name conveyed a solid comparability to the Arabic expression “Sirah,” which is a term utilized for biographical messages regarding the life of Muhammad in the Quran. FINRA is an administrative body that is entrusted with administering all business dealings carried out between brokers, dealers, and every public investor (Kotz, 115). FINRA is the single biggest independent administrative body for securities firms that work in the United States. Although its principal task is to secure or protect financial specialists by guaranteeing that the U.S. securities industry works in a genuine and reasonable way, FINRA has to deal with or manage a huge number of smaller undertakings so as to make or get this going. The National Association of Regulatory Authority (NASD) was established in 1939 and then registered with the Securities Exchange Commission (SEC). In addition, in 1971, NASD launched the NASDAQ stock market. NASD, the forerunner of FINRA, 2 established the NASDAQ but in 2006, NASD demutualized from NASDAQ as a result of selling its ownership interest (Peirce, N.p). The NASD, currently referred to as FINRA, distributes many instructive data for the general public and has been publishing and unveiling the training and exam prerequisites for the United States-based accreditations, designations, charters and affirmations or certifications that the SROs offer for around ten years. However, in 2000, the body underwent a major recapitalization which made it became independent from NASD. In 2007, seven years later, the formation of FINRA was approved by the Securities Exchange Commission (Peirce, N.p). Although the total numbers of the organizations that FINRA oversee change fairly every now and again, as of 2016, the regulatory body manages more than half a million registered securities representatives, over 4,500 brokerage firms and around 160,000 branch offices (Peirce, N.p). FINRA works from its home office in Washington, D.C. and New York City as well as from 20 regional offices that are spread all through the United States. Additionally, FINRA oversees or manage all securities firms; FINRA directs all organizations offering professional training, testing and authorizing of the enlisted brokers (Kotz, 116). It likewise is responsible for monitoring market regulation and arbitration by contract for the NASDAQ stock exchange, the International Securities Exchange LLC, the New York Stock Exchange (NYSE), and the American Stock Exchange LLC (Peirce, N.p). In addition, FINRA gives administrative or regulatory oversight to industry utilities, for example, over-the-counter (OTC) operations and trade reporting offices or facilities. FINRA’s jurisdiction, investigative and enforcement process FINRA’s jurisdiction, investigative and enforcement process FINRA is the biggest self-regulatory organization (SRO) within the securities industry in the U.S. An SRO refers to a membership-based association that formulates and enforces rules for members taking into account the government securities laws. SROs, which are supervised by the SEC, are the front line in the regulation of broker-dealers. FINRA’s main goal or mission is to protect the investors and other financial specialists by ensuring the United States securities industry works honestly and fairly (Armour et al. N.p). FINRA directs or regulates trading in corporate bonds, securities options, equities, and securities futures. All organizations that deal in securities that are not regulated by any other SRO, for example, by the MSRB (Municipal Securities Rulemaking Board), are usually needed to be member organizations of the FINRA (Survey, National, and Executive Summary, 11). As a feature of its administrative power, FINRA occasionally carries out administrative exams of 3 the institutions that it regulates. FINRA recently discharged its tenth yearly Regulatory and Examinations Priorities Letter for 2015. This document helps in impacting broker-dealers together with their partnered insurance agencies and banks. FINRA distinguished variable annuities as a huge range of center for exams in 2015 in its Regulatory and Examinations Priorities Letter for 2015. It then called attention to specific components of sales practices that will be investigated (Armour et al. N.p). In addition, the regulatory body licenses people and carries out admission of firms to the industry, it composes guidelines to oversee their conduct, carefully examines the firms for regulatory compliance or consistence. On the other hand, the regulatory body is sanctioned or endorsed by the U.S. Securities and Exchange Commission (SEC) to discipline the registered representatives as well as member firms that tend to neglect to conform to government securities laws and the guidelines and controls of the FINRA. It gives training and capability examinations to industry experts. It likewise offers outsourced regulatory services and products to various securities exchanges and trades; for instance, the International Securities Exchange (ISE) and American Stock Exchange (AMEX) (Armour et al. N.p). FINRA is one team having a single mission. The mission is very clear that is to safeguard the investors and advance market respectability or integrity. The effectiveness of the organization is vital to the soundness of the capital markets (Survey, National, and Executive Summary, 11). This is because FINRA touches practically every aspect of the U.S. securities business, such as composing rules, looking at securities firms to guarantee that they are sticking to those standards and, when important, taking actions against the firms or brokers that fail to comply; and registering or enrolling brokers, securities firms, and mutual fund corporations (Kotz, 119). Also, FINRA informs and educate the investing public, give realtime transaction as well as price data for corporate security exchanges and in this manner conveying straightforwardness to the market; and administer the biggest forum particularly intended to resolve securities-related disputes (Armour et al. N.p). In order to fulfill these duties every day, the regulatory body is focused on recruiting and retaining the absolute best workers. Additionally, FINRA aims at resolving securities disputes, for instance, in case problems arises between investors and brokers, it is their duty to administer the biggest forum that is particularly deigned to resolves such disputes regarding securities among and between individual brokers, investors and securities firms. FINRA’s dispute resolution is regarded as the country’s largest for the securities industry because it deals with close to 100 percent of arbitrations and medications that are securities-related for over 70 hearing locations. This includes at least a single case in all the 50 states, Puerto Rico and London (Kotz, 129). 4 Another jurisdiction of FINRA is detection and prevention of wrongdoing in the US markets. In doing so, FINRA utilizes sufficiently powerful technology in looking across the markets to detect the potential abuses. They are able to identify insider trading as well as any methodologies firms or people use to pick up unfair or undue advantage by using an assortment of data gathering techniques (Survey, National, and Executive Summary, 11). Truth be told, FINRA processes averagely 50 to 75 billion transactions each day to assemble an entire, all encompassing picture of market trading in the United States. They likewise work behind the scenes with an aim of identifying and fighting fraud. On top of their enforcement actions, FINRA in 2015 referred over 800 insider trading and fraud cases to the Securities Exchange Commission and other agencies (Armour et al. N.p). This sharing of information with other regulators ensures that important actions are taken thereby preventing further harm to the investors. Also, FINRA has jurisdiction over investment firms and professionals selling variable life as well as variable universal life products. According to the above statement, it is clear that FINRA has jurisdiction only over individuals who are affiliated with the securities industry because that is where they can ask for or force cooperation to establish evidences of violations (Kotz, 129). In order to avoid sanctions, brokers should not encourage their clients to avoid or not cooperate with the FINRA authorities as it is a violation of the FRINRA rules and regulations itself. Although brokers are not obliged to respond to the request of FINRA for information, they must Endeavour to cooperate so as to avoid permanent ban from the industry. On the other hand, the regulator makes the use of Rule 8210 that serves as subpoena for its examinations (Survey, National, and Executive Summary, 11). Such a rule requires brokerdealers, any registered representative as well as any other individuals who are subject to the jurisdiction of FINRA to fully cooperate in any examination and give written, oral, and electronic information when requested (Kotz, 126). Although barring a broker who chooses not to respond from the association from any member firm of FINRA in any capacity on top of other sanctions may seem to be contrary to their 5th Amendment right against self-incrimination, the 5th Amendment is not applicable here because FINRA is a non-governmental agency. However, brokers who fail to cooperate with FINRA are voluntarily turned to other law enforcement agencies by FINRA who then subpoena them. Additionally, the Bylaws of FINRA provide for jurisdiction for the purposes of Rule 8210 over once enlisted brokers and related people for two years after terminating the registration (Kotz, 119). This period can start from the very beginning in case the broker alters his or her Form U5 to uncover actionable conduct during the two-year time frame that 5 follows the termination of the registration. In this manner, it is feasible for FINRA to keep up jurisdiction over any formerly registered broker for just about four years (Armour et al. N.p). FINRA has different investigative and enforcement processes. In order to pursue their mission of protecting the investing public against bad practices and fraud, FINRA write and enforce rules and regulations for all brokerage firms and brokers in the US. Also, they examine broker-dealers if they comply with their rules, rules of the Municipal Securities Rulemaking Board and federal securities laws (Survey, National, and Executive Summary, 11). All brokers should be FINRA licensed and registered and must pass the qualification examinations and also meet the continuing education requirements. FINRA sends hundreds of professionally trained financial examiners into the field to take a close look as the operations of the brokers. Such routine examinations and inquiries based on the investor complaints and suspicious activities ensure that brokers provide information in a balanced and fair manner. FINRA has technology, experts and authority that respond quickly to any wrongdoing in the securities market and in case any broker break the rules, they can be fined, suspended or barred from the industry. The regulator’s aggressive vigilance ensures smooth operation in the securities industry as they order restitution to the harmed investors (Kotz, 129). Examples of ethics matters since the financial crises of 2008 High ethical standards play a key role in maintaining the trust of the public in the financial markets as well as in the investment profession. FINRA characterizes ethics and conduct as the arrangement of unequivocal and certain practices, norms and expected behaviors that impact how firm administrators, supervisors, and workers settle on and execute choices over the span of directing the company’s business (Beatty, Anne, and Scott Liao, 339). The ranges of examination are structures firms use to create, convey, and assess conformance with their way of life. There has been several examples of ethics matters that have occurred within that FINRA’s jurisdiction since the financial crises of 2008 (Kotz, 130). Firstly, there has been LIBOR rate-fixing scandal in 2012 that portrayed a shocking case of the group conduct. Without a doubt, the Barclays employees plot to alter the rates is the sort of conduct that makes investors question where the values of the industry lie (Survey, National, and Executive Summary, 11). In addition to conspiring to fix the rate, the employees likewise straightforwardly joked about the little supports or favors given as a result of altering the rate. It all began by a trader posting notes in a journal as a suggestion to adjust the numbers the next week. Then another trader frequently yelled out to associates the specific rate he needed, so different partners could audit on the off chance that they had 6 clashing solicitations (Armour et al. N.p). The outright way in which the representatives cooperated and with brokers from different banks imply a certain thing: the conduct was widespread and endured or tolerated. This unethical behavior is contrary to the values and norms of the regulator. Another example of ethics matter that has occurred within that regulator’s jurisdiction since the financial crises of 2008 includes corporate fraud and providing the public with inaccurate information on investment professionals. The Co-Founder of OXY water together with his wife was sentenced for money laundering and wire fraud on August 25, 2015. They engaged in a scheme to deceive or present false information to the investors in Imperial with a sole purpose of making the firm look more lucrative and a profitable financial investment (Beatty, Anne, and Scott Liao, 345). In doing so, investor’s funds were misappropriated to the tune of $2 million which as a result cause the investors to suffer huge losses when the company had to declare bankruptcy without assets. On the other hand, the owner of the Mystic Pizza Restaurant engaged in an unethical behavior of structuring cash or financial transactions. He did this intentionally with the aim of avoiding having the bank file Currency Transaction Reports between January 2010 and January 2011. In these high competitive financial markets, management of certain firms fails to articulate and practice high standards of ethical conduct with an intention of making huge profits at the expense of investors. Firms have instituted poor corporate governance; sales as well as market share goals which have led to the irresponsible actions by the brokers, traders, sales personnel as well as other employees who act in self interest (Kotz, 117). Brokers usually choose not to offer alternatives to inexperienced clients who are not fully equipped to make informed and meaningful decisions without other options. In addition, brokers have been accused of mixing truth with untruth, giving insufficient explanation and discreet silence (Beatty, Anne, and Scott Liao, 382). Finally, some firms have failed to institute a system of rewards and corrections and have introduced some reward systems that encourage unethical behaviors within the employees. Because the competitive firms in the profit-making industry in the capitalistic society, broker-dealers are compelled to remunerate their representatives in a way that perceives commitments to the business. Therefore, the firms are taking a look at the part that remuneration practices play in strengthening or undermining social qualities, as a follow-up to its more extensive audit of conflict of interest. These unethical practices have impacted the accuracy and totality of the details that are provided on the registered individual’s Form 7 U4 (Kotz, 129). In addition, FINRA has experienced an unethical behavior in the form of compliance breakdown and the continued resurgence of problems or issues that that had beforehand received broad coverage and publicity which has raised questions regarding the existence of firm’s culture tolerating such as a repeated problematic behavior. This indicates that just rules are not sufficient in addressing the genuine difficulties or challenges facing financial firms to make sure that good or ethical people or firms do not take actions that pose financial harm to their clients or expose their firms (Survey, National, and Executive Summary, 11). Such an unethical behavior is as a result of the powerful pressure to conform. Changes that have been made as a result of the above ethical matters The above ethical matters have necessitated the regulator to make several changes to ensure that firms or broker-dealers are as ethical as possible in their dealings. firstly, in the FINRA’s continuing efforts to battle or combat fraud and furnish people in general with accurate information on the investment professionals, FINRA recently executed changes to the background check requirements for the people who are registered with them (Kotz, 124). These progressions extend the commitment of the member firms to examine the applicant’s background for enlistment by affirming the fulfillment and precision of the information found on an individual’s Form U4, which is the record used to enroll people with FINRA member firms. This change is very effective because it streamlines and clarifies the background check responsibility of member firms with an aim of including more relevant and accurate information that concern the broker-dealers as well as registered individuals to be included in the regulator’s WebCRD and BrokerCheck databases (Armour et al. N.p). This new FINRA background check requirements will greatly help in improving the totality and accuracy of details that are reported on the individual’s Form U4 thereby ensuring that ensure that the investors get all the relevant and important data or information on the people who are entrusted with investing their money which in turn increases investor confidence and trust as well as solving the problem of the conflict of interest. The first change requires the consideration of the private background checks, reference letter and credit reports to ensure that there will be good character and business reputation. The second change requires the verification of the accuracy and completeness of the information found in the U-4 by searching the reasonably available public records. In order to maintain full compliance, member firms are in charge of embracing written systems for confirming or verifying the data on Form U4. This methodology ought to indicate the process for completing any necessary important public record research as well as providing that those checks will incorporate, at least, a national inquiry of accessible filings (Survey, 8 National, and Executive Summary, 11). With the FINRA’s new background check rule, it has the ability of streamlining the screening procedure of securities experts for enlistment as well as getting more pertinent and precise data to battle misrepresentation and instruct financial specialists. I believe this change is effective because it streamlines the screening procedure of securities experts (Kotz, 126). There are other several further changes that I would make to the regulatory structure to encourage more ethical conduct in the industry. Firstly, the regulator needs to demand that firms consider finding a way to exhibit that they have made morals and culture a high priority for the organization. Such steps include setting tone at the top. The organization need to set organization culture strategies and make them open to all partners by posting them on the organization intranet and any mobile devices that are available to all representatives as a perspective (Survey, National, and Executive Summary, 11). This will provide a check for the company’s actions that avoiding unethical behaviors. The company should also make sure channels exist for the workers to effortlessly and safely report conduct or ethics infringement, for instance, online submission form or whistleblower hotline without the fear of intimidation by the bosses. Also, they need to fortify or reinforce organizations’ values by means of town halls as well as departmental or company-wide events. In addition, FINRA need to screen employee incentive or compensation structures to guarantee they do not encourage, contradict or counteract high ethical standards. The organizations need to reward or remunerate representatives for the ethically-driven behavior (Beatty, Anne, and Scott Liao, 339).

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