Our History

For more than two centuries, the securities industry in the United States has been governed by private arrangements to regulate business conduct—membership organizations that set rules for their members, and then hold members accountable if they break the rules.

The earliest such “self-regulatory organizations”—or SROs—date to the 1790s, when groups of traders in New York and Philadelphia agreed to abide by rules they established, including complying with “just and equitable principles of trade.” This approach to members self-governing their activities grew over the next hundred years, with the establishment of regional stock exchanges that had the power to set and enforce rules for their members—most prominently, the New York Stock Exchange. Exchanges were the most significant venue for buying and selling securities, and these organizations sought to establish the “rules of the road” for their traders.

Following the stock market crash of 1929 and the Great Depression, Congress in 1934 established the Securities and Exchange Commission, a federal regulator charged with overseeing the securities industry, including the exchanges. The SEC did not replace the NYSE and other exchange’s self-regulatory functions. Instead, Congress required the exchanges to register with the SEC and be subject to SEC supervision.

While exchanges remained popular places to buy and sell securities, trading in the early twentieth century had also grown “off-exchange” in informal networks of securities dealers. As with the rise of exchange trading, there were also efforts by associations of securities firms to self-regulate this activity. The newly formed SEC studied the appropriate form of regulating off-exchange trading and consulted extensively with these associations.

Recognizing the growing significance of off-exchange activity and informed by the SEC’s studies, Congress passed the Maloney Act in 1938 to better regulate off-exchange trading and create a system of “cooperative regulation” between the SEC and “representative organizations of investment bankers, dealers, and brokers.” Like the exchanges, these “national securities associations” would be required to be registered with the SEC. The associations would largely perform the regulatory role regarding broker-dealers’ off-exchange activities, with the SEC “exercising appropriate supervision in the public interest, and exercising supplementary powers of direct regulation.”

With this cooperative regulation, Congress harnessed the benefits and resources of the existing self regulatory initiatives by the industry while preserving the federal government’s full authority and extensive supervision of those initiatives. Associations could establish high ethical standards agreed upon by their members—including those beyond the scope of federal law. Both the SEC and associations could draw upon the expertise and insights of member firms to support better, more-informed regulation. And Congress could avoid further enlarging the new SEC or drawing on additional taxpayer dollars to support it.

In 1939, FINRA’s predecessor, the National Association of Securities Dealers (NASD), officially registered with the SEC as a national securities association. Like members of exchanges, members of the NASD were required to “observe high standards of commercial honor and just and equitable principles of trade.” These initial rules also prohibited members from “mak[ing] improper use of a customer’s securities or funds.” The NASD began enforcing these rules under the supervision of the SEC, censuring, fining, and expelling members from the organization for misconduct.

Throughout the next eight decades, NASD evolved into the FINRA of today, adapting to an ever changing market while remaining rooted in its mission and membership. Many things have remained the same: core rules from the early days of SROs still apply today, including the fundamental requirement to observe just and equitable principle of trade. Other things have changed: today, cutting-edge technology enables FINRA to oversee trading across the U.S. markets, and our membership includes firms with business models that simply did not exist in 1939. But, at every turn, FINRA has sought to protect investors and safeguard the integrity of our vibrant capital markets to ensure that everyone can invest with confidence.