NASD and FINRA Explained: Their Roles, History, and Impact on the Securities Industry
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Summary:
The National Association of Securities Dealers (NASD) was a vital regulatory organization that played a pivotal role in overseeing the securities industry, including the NASDAQ stock market. Founded in 1939 and a major contributor to the creation of the NASDAQ in 1971, NASD monitored stock market activities until its merger with the New York Stock Exchange’s regulatory and arbitration arm in 2007, forming the Financial Industry Regulatory Authority (FINRA). This article explores the history and significance of NASD, its evolution into FINRA, and the key roles both organizations have played in regulating the financial markets.
What was the national association of securities dealers (NASD)?
The National Association of Securities Dealers (NASD) was a self-regulatory organization that wielded significant influence over the securities industry, with a particular focus on regulating the NASDAQ stock market and over-the-counter markets. NASD was responsible for overseeing market operations and conducting exams for investment professionals, such as the Series 7 exam. It also closely monitored the NASDAQ’s market operations.
The NASD’s origins and role
The NASD came into existence in 1939, established under the provisions of the 1938 Maloney Act amendments to the Securities Exchange Act of 1934. It wasn’t merely a regulatory body; it was a crucial driving force behind the creation of the NASDAQ stock market in 1971.
The role of NASD
Operating under the overall supervision of the Securities and Exchange Commission (SEC), the NASD played a central role in managing stock trading activities from 1939 to 2007. During this time, it functioned as a guardian of stock market operations and played a critical part in maintaining market integrity.
The birth of FINRA
In 2007, the NASD underwent a transformative merger. It combined its forces with the regulation, enforcement, and arbitration division of the New York Stock Exchange to give birth to the Financial Industry Regulatory Authority (FINRA).
NASD vs. FINRA
FINRA, much like its predecessor NASD, operates as an independent regulatory entity responsible for overseeing all stock market operations in the United States. This includes the supervision of brokerage firms, branch offices, and securities representatives. Additionally, FINRA is monitored by the SEC and holds the authority to enforce SEC’s rules and regulations.
FINRA also facilitates the licensing of securities representatives engaged in various aspects of the market. Licensing requirements are developed in close coordination with SEC regulations and oversight. Prominent FINRA licenses encompass Series 3, 6, and 7. Beyond individual and firm licensing, FINRA conducts ongoing educational seminars and monitors the activities of individuals and firms participating in financial markets to ensure regulatory compliance.
FINRA’s role in the securities market
As the primary regulatory body in the securities market, FINRA manages the market’s Central Registration Depository (CRD), which maintains records of securities activities for all firms and securities representatives engaged in market trading. Additionally, FINRA serves as the leading arbitrator for financial market trading disputes. Arbitration is a prevalent method for resolving disputes between entities and trading representatives in the financial markets. FINRA administers arbitration proceedings that resemble formal court cases but with reduced costs. FINRA’s arbitration panels are responsible for delivering final rulings on arbitration cases.
Furthermore, FINRA collaborates with the North American Securities Administrators Association (NASAA), an organization overseeing the licensing requirements for three essential market licenses: Series 63, 65, and 66.
Frequently asked questions
What were the NASD’s primary functions?
The NASD’s primary functions included overseeing the securities industry, regulating the NASDAQ stock market, monitoring over-the-counter markets, and administering exams for investment professionals.
Why did NASD merge with the NYSE Regulatory Division?
The merger between NASD and the New York Stock Exchange’s regulatory division in 2007 was aimed at creating a more robust and comprehensive regulatory body, FINRA, capable of overseeing and regulating the entire spectrum of the securities industry.
What is the role of FINRA in the financial markets?
FINRA plays a pivotal role in the financial markets, overseeing brokerage firms, branch offices, securities representatives, and maintaining records of securities activities. It also administers licensing, conducts educational seminars, and serves as the main arbitrator for financial market trading disputes.
What were the core functions of NASD?
NASD played a multifaceted role in the securities industry. Its core functions included overseeing the NASDAQ stock market, regulating over-the-counter markets, and administering exams for investment professionals. Additionally, it ensured compliance with industry rules and regulations.
Why was NASD created in the first place?
NASD was established in 1939 under the provisions of the 1938 Maloney Act amendments to the Securities Exchange Act of 1934. Its creation was driven by the need for an organized regulatory body to bring order to the securities industry and instill confidence in the market, especially in the wake of the Great Depression.
How did NASD contribute to the NASDAQ stock market?
NASD was a pivotal founder of the NASDAQ stock market, which became one of the most prominent stock exchanges globally. It played a crucial role in designing the market’s structure and rules, fostering its growth and success.
What led to the merger of NASD and the NYSE regulatory division?
The merger in 2007 aimed at creating a more comprehensive and powerful regulatory body capable of overseeing the entire spectrum of the securities industry. By uniting NASD’s expertise in market regulation with the NYSE’s regulatory and arbitration division, FINRA could better serve the industry and investors.
What role does FINRA play today in regulating the securities industry?
Today, FINRA operates as an independent regulatory entity overseeing all aspects of the securities industry in the United States. It not only monitors brokerage firms, branch offices, and securities representatives but also administers licensing, conducts educational seminars, and serves as the main arbitrator for resolving financial market trading disputes.
Is FINRA the sole regulator for the securities industry?
While FINRA is a major regulatory authority, it collaborates with other organizations, such as the U.S. Securities and Exchange Commission (SEC) and the North American Securities Administrators Association (NASAA). Each entity has specific roles in regulating different aspects of the securities market, ensuring a comprehensive regulatory framework.
Can you provide examples of key FINRA licenses and their significance?
Yes, FINRA issues various licenses, with some of the most notable ones being Series 3, 6, and 7. These licenses allow individuals to engage in different financial market activities. For instance, the Series 7 license permits professionals to become general securities representatives and conduct a wide range of financial transactions.
Key takeaways
- The National Association of Securities Dealers (NASD) was a crucial regulatory body overseeing the securities industry, including the NASDAQ stock market.
- Founded in 1939, NASD played a significant role in the creation of the NASDAQ stock market and operated under SEC’s supervision until 2007.
- In 2007, NASD merged with the NYSE regulatory division to form the Financial Industry Regulatory Authority (FINRA).
- FINRA serves as an independent regulatory entity, overseeing all aspects of the securities industry in the United States, including licensing, education, and arbitration.
- FINRA collaborates with the North American Securities Administrators Association (NASAA) in regulating market licenses.
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