GLG Investor Insights: What is FINRA?
As referenced in our previous blog posts, we often mention that investors may be able to recover their investment losses through securities arbitration before “FINRA.” But what is FINRA, and furthermore, why should an investor’s dispute be resolved with FINRA instead of a court of law? These are common questions among investor clients. If you believe you have a claim against a broker or other financial services professional related to investment losses, you may be advised that filing a securities arbitration claim with FINRA is the proper course of action.
The Financial Industry Regulatory Authority (FINRA) is a self-regulatory organization (SRO) that is overseen by the Securities and Exchange Commission (SEC). FINRA is charged with regulating the brokerage industry, a comprehensive responsibility that includes oversight of more than 624,000 registered representatives and more than 3,500 securities firms, including broker-dealers. FINRA is the successor to the former National Association of Securities Dealers (NASD)—in 2007, FINRA commenced operations following the consolidation of the NASD and the member regulation and enforcement arm of the New York Stock Exchange (NYSE). As a membership-based organization overseen by the SEC, FINRA is not a part of the government and operates as a not-for-profit entity as it creates and enforces securities industry rules for its members based on federal laws.
Based in New York City and Washington, DC, with 19 offices and 3,600 employees throughout the United States, FINRA regulates brokerage firms, stockbrokers, and exchange markets including trading in equities, corporate bonds, securities futures, and options. Because FINRA regulates broker-dealers and stockbrokers—such as by admitting firms and licensing individuals as well as disciplining registered representatives and member firms—investor disputes with such individuals and firms routinely fall under FINRA’s jurisdiction.
Individual customer claims against stockbrokers and broker-dealers are usually pursued through securities arbitration proceedings before FINRA. This is because in nearly all instances, when opening a brokerage account, an investor will sign account-opening paperwork mandating securities arbitration as the method of dispute resolution. And ever since the late 1980s—following the Supreme Court’s decision in Shearson/American Express v. McMahon, 482 U.S. 220 (1987) that pre-dispute agreements to arbitrate securities disputes were binding and arbitrable—customers seeking to recover their investment losses have been required to proceed with securities arbitration.
In general, FINRA arbitration proceedings are quicker and more streamlined than a traditional lawsuit filed in state or federal court. Depending on the amount in controversy, a FINRA matter can involve one or three arbitrators, as selected by the parties to the dispute in a manner akin to jury selection. In some instances, a smaller claim may be decided “on the papers” via a simplified arbitration without an actual hearing before an arbitrator or panel of arbitrators.
Upcoming installments of GLG Investor Insights will address the FINRA arbitration process in greater detail, and show how FINRA helps to provide investor protection and promote market integrity.