The United State Securities and Exchange Commission (SEC) oversees the US financial markets and the players therein. But there’s another regulatory agency that supervises the financial industry that investors tend to be less familiar with. While the SEC is well-known for its high profile busts of white collar criminals like Bernie Madoff, the Financial Industry Regulatory Authority, or FINRA, doesn’t make many national headlines.
But for retail investors who like to play the stock market through their brokers, FINRA may be far more important than the SEC. And if things go wrong, and you end up suing your stock broker, well, then the five letters of that acronym will become very familiar to you — perhaps even unforgettable.
FINRA: the “Other” securities Regulatory Body
That’s because FINRA is not only responsible for overseeing broker-dealers who work with retail investors, but it also handles securities litigation matters. FINRA’s arbitration forum is the primary place in which disputes over broker misconduct and investment fraud, among other things, must be resolved. If you think you can sue your nefarious stock broker in a court of law, think again. Nearly all broker-dealer now impose a binding arbitration agreement on new clients as part of their account opening documents. This agreement forces investors with a dispute to seek resolution through FINRA arbitration — and then and only then, maybe, and investors sue brokers in court.
FINRA is far from a shadowy regulatory agency, however. They do their best to find themselves in the public eye, if only to keep investors informed on current regulations and scams. They also keep an exhaustive database of the professional records of all registered broker-dealers and financial advisors; the database is online and searchable. FINRA’s BrokerCheck is a mighty tool for investors seeking to learn more about their advisors; it’s one of many tools and rules that investors can use to protect themselves against fraud and malfeasance.
Top Rules and Tools of FINRA
Here’s our list of the most powerful FINRA rules and tools for retail investors:
FINRA’s BrokerCheck
FINRA’s BrokerCheck offers retail investors a way to do an informal background check on their current on or on prospective financial advisors. The database includes employment history, including terminations, as wel as any customer complaints or disputes filed against a broker or broker-dealer.
Suitability Rule
The most important rule in the FINRA rulebook, suitability is a heated topic in securities litigation because it leaves much room for interpretation. In a nutshell, however, FINRA mandates that a broker must have a reasonable basis for believing an investment is suitable for any investor; and then a further basis for believing the investment is appropriate for a specific investor. For more on the rule, click here.
Investor Alerts
In order to keep investors apprised of the latest in securities scams, FINRA sends out regular investor alerts. These alerts deal with topics on everything from IRS scams to how brokers might exploit elderly investors.
FINRA Arbitration Forum
If you ever find yourself in a dispute with a broker, you’ll quickly find out how important it is know more about the arbitration forum. It’s here that your case will be adjudicated by an arbitration panel, and hopefully resolved to your satisfaction.
