How Does FINRA Enforce its Rules?

By Alisa Radut, Fall 2017 IAC Student Intern

On this blog, we discuss the many ways in which FINRA regulates the arbitration process, but that’s not all that FINRA does.  FINRA also handles the regulatory parts of its organization, and it polices its own.  I will talk about that process in a five-part series.

In order to maintain confidence in the securities markets, FINRA’s Enforcement Department helps ensure its members comply with not only FINRA’s own rules and the federal securities laws and regulations that apply to its members.  Upon investigation, once the department determines a violation has taken place, the Enforcement Department will take formal disciplinary action.  Sanctions can include fines and suspensions of brokers and firms from the industry.

The two ways in which FINRA can take disciplinary actions against firms and brokers who break securities rules are by issuing a formal complaint or through a settlement.  The formal complaint is filed by The Enforcement Department, with FINRA’s Office of Hearing Officers, an office of impartial adjudicators, comprised of two industry adjudicators and a Hearing Officer who administer the case. This regulatory body is independent from FINRA’s regulatory program, and the officers are not involved in investigations into the wrongdoings.  In hearing a case, the Office of Hearing Officers can issue orders, conduct pre-hearing conferences, rule on motions, decide what evidence is admissible, and make other decisions necessary under the FINRA’s Code of Procedure, which was approved by the Securities and Exchange Commission to govern the hearing procedures.  The hearings are similar to court hearings, where parties submit their list of witnesses and exhibits and pre-hearing briefs setting forth their arguments beforehand.  At the conclusion of the hearing, the panel prepares a hearing panel decision draft, which includes the factual findings, legal conclusions, and sanctions (guided by FINRA’s Sanction Guidelines), when necessary.