FINRA Enforcement Part 2: Market Regulation

By Kelly Robinson, Spring 2016 Student Intern

In our previous post FINRA Enforcement Part 1: Member Regulation we discussed how FINRA ensures compliance with firms and individual brokers. While member regulation is an important aspect of FINRA’s enforcement of industry rules, those rules don’t matter much if market itself is unregulated. Today, we’ll be discussing what steps FINRA takes to ensure integrity in the securities market.

FINRA provides oversight and regulatory services for equities and options markets (most notably NASDAQ and the NYSE) and monitors trading activity of a variety of securities such as corporate bonds and municipal securities. FINRA implements surveillance programs within these markets and is able to analyze orders as they move through the market. This surveillance system then looks for suspicious activity using highly sophisticated technology. Currently, FINRA’s Market Regulation Department monitors approximately 99 percent of the equities market and approximately 70 percent of the options market.

Another aspect of market regulation involves examining firms and bringing disciplinary actions against non-compliant firms and their associated persons. To see what is of priority in the 2016 exam check out the 2016 Regulatory and Examination Priorities Letter. If FINRA determines there are violations, the Market Regulation Department files a complaint with the Office of Hearing Officers, an independent department from FINRA Market Regulation Department. There is then a three-person panel who hears the case with each side offering evidence. At the conclusion, the panel determines whether violations have occurred and if so, what sanctions should be put in place.

Without such enforcement, investors would be wary of entering the securities market and may find themselves subject to a lot more fraud. Additionally, market regulation allows some investors to achieve restitution. Just to put in perspective the kind of impact FINRA has had on the market: in 2014, FINRA brought 1,397 disciplinary actions against registered individuals and firms, and levied $134 million in fines. As a result, FINRA expelled 18 firms from the securities industry and was able to order $32.3 million in restitution to harmed investors.