The National Association of Securities Dealers (NASD) was a self-regulatory organization responsible for overseeing the operations of its members in the securities industry. Formed in 1939, NASD’s primary role was to enforce ethical and fair business practices among securities dealers, brokers, and exchanges. In 2007, NASD merged with the regulatory arm of the New York Stock Exchange (NYSE) to create the Financial Industry Regulatory Authority (FINRA).
Evolution from NASD to FINRA
Historical Context
The NASD was established in response to the Securities Exchange Act of 1934, which aimed to restore investor confidence in the securities market following the Wall Street Crash of 1929. The Act provided a regulatory framework that required securities dealers and brokers to register with the Securities and Exchange Commission (SEC).
Formation of FINRA
In 2007, NASD merged with the NYSE’s regulatory unit, resulting in the formation of the Financial Industry Regulatory Authority (FINRA). The purpose of this merger was to streamline and enhance the regulatory oversight of securities firms and brokers across the United States.
Functions of NASD (Now FINRA)
Regulation and Compliance
FINRA, carrying forward the legacy of NASD, supervises brokerage firms and their associated persons to ensure they adhere to federal securities laws. This involves:
- Implementing rules and regulations that promote market integrity.
- Conducting examinations and audits of brokerage firms.
- Enforcing disciplinary actions for violations of established rules and regulations.
Licensing and Registration
FINRA oversees the licensing and registration of individuals and firms in the securities industry. All brokers and brokerage firms must comply with FINRA’s registration requirements before they can conduct business.
Education and Training
FINRA provides educational resources and training programs to ensure industry participants understand their regulatory obligations. These programs are designed to enhance professional standards and ethical practices in the securities industry.
Market Transparency and Surveillance
FINRA operates reporting and transparency platforms such as TRACE (Trade Reporting and Compliance Engine) for bond transactions to ensure real-time reporting and market openness.
Relevance and Applicability
Investor Protection
FINRA’s regulation helps protect investors by ensuring that markets operate fairly and honestly. By enforcing ethical practices, FINRA promotes trust and confidence in the financial markets.
Improving Market Efficiency
Through its regulatory oversight, FINRA aids in the smooth functioning of financial markets, helping to prevent market manipulation and fraudulent activities.
Comparison with Other Regulatory Bodies
SEC vs. FINRA
While the SEC is a government agency that administers federal securities laws, FINRA is a self-regulatory organization (SRO). The SEC oversees FINRA and has the authority to approve or disapprove FINRA’s rules and regulations.
FINRA vs. CFTC
The Commodity Futures Trading Commission (CFTC) regulates the U.S. derivatives markets, while FINRA focuses on the securities industry. Both organizations have distinct but sometimes overlapping roles in financial market regulation.
Related Terms
- SEC (Securities and Exchange Commission): An independent federal agency responsible for enforcing federal securities laws and regulating the securities industry.
- Self-Regulatory Organization (SRO): An organization that exercises some degree of regulatory authority over an industry or profession, like FINRA in the securities market.
- TRACE (Trade Reporting and Compliance Engine): A system established by FINRA for reporting and disseminating bond transaction information.
FAQs
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References
Summary
The National Association of Securities Dealers (NASD), now part of FINRA, played a crucial role in regulating the securities industry to promote fairness, transparency, and ethical behavior. Its merger with the NYSE’s regulatory arm to form FINRA enhanced the effectiveness of securities regulation, contributing to a more secure and efficient marketplace.
