10.1.1. FINRA
Remember that in 1938 the Securities Exchange Act of 1934 was amended to extend the self-regulatory concept to the over-the-counter market. This amendment, called the Maloney Act, requires that broker-dealers register with the SEC and become members of a registered national securities association. Out of this act, the National Association of Securities Dealers (NASD) was created. In 2007 NASD consolidated with the regulation, enforcement, and arbitration functions of the NYSE to become the Financial Industry Regulatory Authority (FINRA). FINRA is an independent, not-for-profit organization and is the largest SRO in the securities industry.
FINRA’s first responsibility is to register and approve all broker-dealers operating in the United States for membership and to regulate and enforce the regulatory rules that guide their practice.
Under Section 5 of the Exchange Act, all broker-dealers must be registered with the SEC and become members of FINRA, except for (1) those who operate exclusively outside the boundaries of the U.S. and (2) those who deal only in exempt securities. Exempt securities, as defined by the Securities Act of 1933, include government bonds (e.g., municipals), U.S. government securities (e.g., Treasury bills and notes), and agency securities (bonds or notes issued by government-sponsored institutions, such as Fannie Mae and Freddie Mac). Member employees engaged in or managing the investment banking or securities business must also be registered.
FINRA establishes and interprets the rules that govern over-the-counter markets, and it is charged with ensuring industry compliance with those rules. FINRA investigates members and registered employees for compliance with securities law, issues complaints against violators, conducts disciplinary hearings, and mediates intra-industry disputes.