FINRA Enforcement Part 1: Member Regulation

By Kelly Robinson, Spring 2016 Student Intern

“Rules are meant to be broken” is not a mantra to live by if you’re a firm or broker (“member”) who sells securities to the public. This is so because members must be licensed and registered by FINRA, the regulatory authority that ensures compliance with their rules, as well as the SEC’s. FINRA enforces these rules with the authority fine, suspend, or even bar brokers from the industry. Enforcement not only keeps members on a level playing field, but also instills consumer confidence in the securities market as a whole.

Part of enforcement involves catching problems before they start, which is what FINRA tries to accomplish through the Membership Application Program or MAP. Once a firm applies for membership, the program ensures the firm has met the standards for admission by examining such aspects as supervisory procedures and the adequacy of communication and operational systems. Sometimes catching the bad guys before they start isn’t always possible, but FINRA also tries to combat bad behavior by subjecting brokerage firms, branch offices, and registered representatives to exams at least once every four years. The process involves examining core areas of the firm’s business with a special focus towards heightened regulatory risks.

FINRA also investigates individual registered representatives for issues with compliance in areas such as excessive trading and misrepresentation. These investigations typically arise from customer complaints, but may also come from automated surveillance reports or as a result of findings in an examination of the firm like that mentioned above. These investigations may lead to the filing of a formal complaint or to settlement of the issue with FINRA through an Acceptance, Waiver, and Consent form (click here for an example).   These investigations not only protect consumers, but also inform future regulatory rules and practices.