Role of self-regulatory organizations (FINRA)
Role of Self-Regulatory Organizations (SROs) — FINRA Focus
What Are Self-Regulatory Organizations (SROs)?
SROs are non-governmental organizations that have been delegated regulatory authority over their members by statutory or governmental bodies.
In the U.S. securities industry, SROs regulate broker-dealers, enforce compliance with securities laws, and protect investors.
They create and enforce rules, conduct disciplinary actions, oversee arbitration processes, and monitor markets.
About FINRA
FINRA is the largest independent regulator for securities firms doing business in the United States.
It was created in 2007 through the consolidation of the NASD (National Association of Securities Dealers) and the regulatory functions of the NYSE.
FINRA’s responsibilities include licensing, examinations, rulemaking, enforcement, dispute resolution, and education.
How Does FINRA Operate?
Rulemaking: FINRA creates rules that govern member conduct, subject to SEC approval.
Enforcement: Investigates and disciplines members for violations.
Arbitration: Provides a forum for resolving disputes between investors and brokers.
Compliance: Conducts exams to ensure firms follow rules.
Investor Protection: Promotes market integrity and educates investors.
Key Case Laws Involving FINRA and SROs
1. Wilko v. Swan (1953) — U.S. Supreme Court
Background:
An investor sued a broker for fraud but was compelled to arbitrate under NASD rules.
Issue:
Whether investors could be forced to arbitrate securities disputes under SRO rules, waiving their right to jury trials.
Decision:
The Court upheld the enforceability of arbitration agreements under the Securities Act of 1933.
Significance:
Established the foundation for mandatory arbitration in securities disputes under SRO rules.
Confirmed SRO arbitration as a valid alternative to court litigation.
2. Shearson/American Express Inc. v. McMahon (1987) — U.S. Supreme Court
Background:
Dispute over whether claims under the Securities Exchange Act of 1934 could be arbitrated.
Issue:
Whether arbitration clauses governed by FINRA/NASD rules could cover statutory securities fraud claims.
Decision:
The Court ruled that statutory claims under securities laws are subject to arbitration.
Significance:
Strengthened the authority of SRO arbitration forums like FINRA.
Expanded scope of arbitrable claims to include securities fraud.
3. Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit (2006) — U.S. Supreme Court
Background:
Investor claimed damages under state securities laws after arbitration.
Issue:
Whether the Securities Litigation Uniform Standards Act (SLUSA) precluded state law class actions arising from securities fraud claims arbitrated under FINRA rules.
Decision:
The Court ruled that SLUSA bars certain state class action claims but affirmed the arbitration process’s validity.
Significance:
Showed how federal law interacts with FINRA arbitration outcomes.
Reaffirmed FINRA arbitration as a central dispute resolution mechanism.
4. FINRA Disciplinary Action Review — Dep’t of Enforcement v. Charles Schwab & Co. (2016)
Background:
FINRA sanctioned Charles Schwab for supervisory failures.
Issue:
Whether FINRA’s disciplinary sanctions were reasonable and consistent with its rules.
Outcome:
The National Adjudicatory Council upheld FINRA’s sanctions.
Significance:
Demonstrated FINRA’s role in enforcing compliance among major firms.
Illustrated SRO’s authority to impose penalties to maintain market integrity.
5. Goldman Sachs & Co. v. City of Reno (2002) — U.S. District Court
Background:
A dispute over the applicability of FINRA rules to municipal securities brokers.
Issue:
Whether FINRA’s jurisdiction extended to certain municipal bond dealers.
Decision:
The court affirmed FINRA’s regulatory authority over members in these transactions.
Significance:
Confirmed FINRA’s broad regulatory reach over its members’ activities.
Clarified scope of SRO authority in niche securities markets.
Summary of FINRA’s Role Based on Case Law
Arbitration Enforcement: Courts consistently uphold the validity of arbitration under FINRA rules, emphasizing faster and specialized dispute resolution.
Regulatory Authority: FINRA’s rulemaking and enforcement powers are broadly supported, provided they comply with statutory limits.
Investor Protection: FINRA’s disciplinary actions against firms and brokers demonstrate its critical role in maintaining market integrity.
Jurisdiction Scope: FINRA’s regulatory authority extends to diverse securities activities, ensuring comprehensive oversight.
RELATED Blog
0 comments