A Reflection on FINRA's History: 1950s

Overseeing Thousands to Protect Millions 

Following World War II, American consumer interest in the stock market surged, thanks to the end of wartime austerity and a surplus of cash. By the mid-1950s one out of every 12 American adults personally held securities, while millions more owned them through insurance companies, mutual funds, or pension funds. 

As stocks boomed and demand soared, so too did the number of people selling securities, including inexperienced dealers pushing dubious securities on an uninformed public through so-called boiler rooms. Not surprisingly, complaints to the National Association of Securities Dealers (NASD) – FINRA’s predecessor -- increased nearly 15-fold between 1951 and 1962. 

By its second full decade of operating as a self-regulatory organization, NASD examined about a third of its members every year, sending examiners to visit firms, review their books and records, and complete field questionnaires and interviews to learn the nature of the firm’s business and its operations. Based on their findings, NASD could impose discipline through sanctions, including censures, fines, suspensions, or expulsions. 

Concerned about the growing number of complaints and unqualified stocks salespeople, NASD established new baseline requirements for its members and introduced a mandatory qualifying exam intended to weed out unqualified representatives, promote industry-wide standards, and strengthen investors’ confidence. Between 1946 and 1958, NASD registered nearly 42,000 representatives, bringing the organization’s total to nearly 70,000, working in nearly 4,000 member offices. 

Member Supervision at a Glance 

Today, FINRA’s examination program is overseen by Member Supervision. It remains a central component of FINRA’s regulatory operations and one of the principal ways FINRA protects investors and promotes market integrity. 

Member Supervision has more than 1,400 employees and is responsible for the review, surveillance, investigation, and examination of member firms and their associated persons. Member Supervision has five primary regulatory programs: Risk Monitoring, Examinations, National Cause and Financial Crime Detection Programs (NCFC), Membership Application Program (MAP), and Statutory Disqualification Program (SD).

FINRA's Oversight in 2024:

FINRA’s Examination Program Today 

The paper-based and surprise in-person exams of the 1950s are a thing of the past. Technology has revolutionized the way FINRA receives information from firms and conducts exams. 

FINRA has transitioned away from the checklist approach to a risk-based approach, with the goal of detecting, deterring, or addressing activities that may cause investor harm or adversely impact the integrity of the markets. Under this approach, FINRA classifies each member firm by primary business model into one of five Firm Groups: Capital Markets, Carrying and Clearing, Retail, Trading and Execution, and Diversified. Each of these groups has teams of Exam and Risk Monitoring staff with subject matter experts who can spot trends and allow FINRA to identify and mitigate potential issues more efficiently.

Member Supervision at Work

Member Supervision works in concert with other departments at FINRA, including Enforcement and Market Regulation and Transparency Services (MRTS), together known as Regulatory Operations (RegOps), to protect customers and maintain market integrity. 

Significant cases like the recent Robinhood Financial matter, which resulted in a record $70 million in financial penalties for systemic supervisory failures and significant harm to millions of customers, is an example of Member Supervision’s partnership with other departments. The sanctions included a $57 million fine and $12.6 million in restitution to thousands of harmed customers. 

FINRA’s investigation found that Robinhood negligently communicated false and misleading information to its customers about a variety of critical issues, including customers placing trades on margin, the amount of cash in customers’ accounts, the risk of loss customers faced in certain options transactions, and whether customers faced margin calls. Robinhood also failed to exercise due diligence before approving customers to place options trades, reasonably supervise the technology that it relied on to provide core broker-dealer services, and report to FINRA tens of thousands of written customer complaints that it was required to report. 

The themes of partnership and collaboration have echoed across the decades at FINRA. Challenges were met with innovation. Uncertainty was met with evolution. The constant: FINRA continuing to live its mission of protecting investors and ensuring market integrity at every turn. 

Stay tuned for the next article about FINRA’s history coming on Dec. 3, when we’ll dive into the 1960s and explore a major milestone in market transparency.