FINRA and Broker-Dealer Regulation

The Financial Industry Regulatory Authority (FINRA) serves as the primary self-regulatory organization (SRO) for broker-dealers in the United States. CFP professionals who work with or through broker-dealers must understand FINRA's regulatory framework, including suitability requirements and the newer Regulation Best Interest (Reg BI) standard.

What Is FINRA?

FINRA is a non-governmental organization authorized by Congress to protect investors by ensuring the broker-dealer industry operates fairly and honestly. Created in 2007 through the consolidation of NASD (National Association of Securities Dealers) and the regulatory functions of the New York Stock Exchange, FINRA operates under SEC oversight.

FINRA's Core Functions:

FINRA's Regulatory Scope

FINRA oversees more than 3,400 brokerage firms and approximately 625,000 registered representatives. The organization monitors broker-dealer activities including:

• Securities transactions and trading practices
• Sales practices and customer communications
• Supervision and compliance systems
• Net capital and customer protection requirements
• Anti-money laundering programs

Suitability vs. Regulation Best Interest

One of the most important concepts for CFP professionals is understanding the standards that apply to broker-dealer recommendations. Two key standards govern this area:

FINRA Rule 2111: Suitability

FINRA Rule 2111 requires that broker-dealers and their representatives have a reasonable basis to believe that a recommended transaction or investment strategy is suitable for the customer. The rule imposes three suitability obligations:

The customer's investment profile includes factors such as age, financial situation, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, and risk tolerance.

Regulation Best Interest (Reg BI)

In June 2019, the SEC adopted Regulation Best Interest, which took effect on June 30, 2020. Reg BI establishes a higher standard for broker-dealers than the traditional suitability rule when making recommendations to retail customers.

Reg BI's Four Component Obligations:

The Care Obligation requires broker-dealers to:

1. Understand the potential risks, rewards, and costs of the recommendation
2. Have a reasonable basis to believe the recommendation is in the retail customer's best interest
3. Have a reasonable basis to believe a series of recommended transactions is not excessive

How Suitability and Reg BI Work Together

FINRA amended Rule 2111 to clarify its relationship with Reg BI. The suitability rule does not apply to recommendations that are subject to Reg BI. In practice:

• Retail customers: Reg BI applies (the higher standard)
• Institutional customers: Rule 2111 suitability applies
• Non-recommendation situations: Neither standard applies

According to FINRA, compliance with Reg BI results in compliance with Rule 2111 because meeting the "best interest" standard necessarily satisfies the "suitability" standard.

FINRA's 2026 Regulatory Priorities

FINRA's 2026 Annual Regulatory Oversight Report, released in December 2025, highlights key focus areas for examination and enforcement:

Priority Areas:

• Reg BI Compliance - Continues as a top priority, with focus on practical implementation including suitability reviews, fee transparency, and supervision of retail recommendations
• Third-Party Vendor Management - Oversight of outsourced functions and vendor risk
• Best Execution - Ensuring customers receive the most favorable terms for transactions
• Consolidated Audit Trail (CAT) - Compliance with securities transaction reporting requirements
• Financial Responsibility - Net capital and customer protection rules
• Cybersecurity and Data Privacy - Emerging risks including generative AI applications

Generative AI as a Standalone Focus Area:

For the first time in 2026, FINRA designated generative AI as a distinct regulatory focus area (previously grouped under "emerging risks"). Firms must evaluate:

• AI-generated customer communications and marketing materials
• AI tools used in investment recommendations or suitability determinations
• Model governance and validation for AI systems
• Disclosure requirements when AI influences customer interactions

CORE Program Enhancements:

FINRA's Continuing Obligation Regulatory Exam (CORE) program expanded in 2026 to include enhanced scrutiny of:

• AML/CFT program effectiveness
• Supervision of digital engagement practices
• Crypto asset communications with customers

The 2026 report signals a shift from static compliance documentation to demonstrable control effectiveness. FINRA expects firms to prove their compliance programs work, not just that policies exist on paper.

FINRA Registration and Qualification

Individuals who work for broker-dealers must register with FINRA and pass qualification examinations. The registration process involves:

1. Form U4 - Uniform Application for Securities Industry Registration
2. Qualification Exams - SIE (prerequisite) plus representative-level exams (Series 6, 7, 63, 65, 66, etc.)
3. Background Check - Criminal history and financial disclosure review
4. Fingerprinting - Required for all registered persons

FINRA maintains the Central Registration Depository (CRD), which contains registration and disciplinary information for broker-dealers and their associated persons. The public can access a subset of this information through FINRA BrokerCheck.

FINRA Enforcement

FINRA has authority to discipline member firms and registered representatives for rule violations. Disciplinary actions range from:

• Fines and censures
• Suspension of registration
• Bar from the securities industry
• Expulsion of member firms

FINRA can also require firms to pay restitution to harmed customers. All disciplinary actions become part of the firm's or individual's permanent CRD record.

For CFP Professionals

Many CFP professionals work in dual-registered environments where they hold both investment adviser and broker-dealer registrations. Understanding FINRA's regulatory framework helps CFP professionals:

• Recognize which standard applies (Reg BI for retail recommendations through a broker-dealer; fiduciary duty for investment adviser activities)
• Maintain proper documentation of the basis for recommendations
• Understand disclosure obligations including Form CRS delivery
• Navigate conflicts of interest between compensation structures and client interests
• Stay current with regulatory priorities that affect compliance expectations