What Is FINRA Compliance and Who Must Follow It?

FINRA compliance refers to the comprehensive set of rules and standards that financial firms and individuals must follow to operate within the securities industry. These regulations exist to protect investors and ensure the integrity and fairness of the financial markets. Adhering to FINRA’s requirements helps to safeguard the public from fraud, manipulation, and unethical practices. This article outlines FINRA’s framework and the obligations it places on financial professionals.

FINRA’s Regulatory Framework

The Financial Industry Regulatory Authority (FINRA) is a self-regulatory organization (SRO) that oversees broker-dealers and their associated persons in the United States. FINRA operates under the direct supervision of the U.S. Securities and Exchange Commission (SEC) to protect investors and ensure the integrity of the U.S. securities markets.

FINRA writes and enforces rules governing registered brokers and broker-dealer firms. This includes firms that buy or sell securities on behalf of customers or for their own accounts. All broker-dealers doing business with the public in the U.S. must register with the SEC and become FINRA members. Membership requires adherence to FINRA’s compliance standards, which cover conduct, operational, and financial requirements. FINRA licenses individuals and admits firms, administering qualifying exams and examining them for regulatory compliance. FINRA’s authority extends to disciplining firms and individuals who violate its rules or federal securities laws.

Core Compliance Obligations

FINRA compliance involves specific rules and areas of conduct that firms and individuals must uphold. These obligations protect investors, foster fair dealings, and maintain orderly markets. They encompass various aspects of how financial services are provided to the public.

Sales Practices

Sales practices are a significant area of FINRA regulation. Rules like the suitability rule and Regulation Best Interest (Reg BI) require firms to recommend investments appropriate for a client’s specific financial situation and objectives. This means understanding a client’s risk tolerance, financial goals, and existing investments before making recommendations.

Communications with the Public

Communications with the public also fall under strict FINRA scrutiny. This includes advertising, social media use, and all forms of client correspondence. Such communications must be fair, balanced, and not misleading. Firms are responsible for supervising these communications to prevent deceptive practices.

Supervision

Supervision is a requirement for all firms, mandating systems to oversee employee activities. This oversight ensures compliance with all applicable rules and regulations, including those from FINRA and federal securities laws. Firms must properly train their representatives and review their activities regularly to ensure adherence to regulatory obligations.

Financial and Operational Rules

Financial and operational rules govern a firm’s financial health and stability. These requirements include maintaining adequate capital, adhering to specific record-keeping standards, and fulfilling reporting obligations. Rules are also in place for customer protection.

Anti-Money Laundering (AML)

Anti-Money Laundering (AML) obligations require firms to detect and report suspicious activities. Firms must establish and maintain an AML program, including customer identification programs (CIPs) and “Know Your Customer” (KYC) procedures. These measures involve verifying customer identities and understanding the nature of their business to identify and report potential money laundering schemes.

Establishing Internal Compliance Programs

Firms regulated by FINRA must develop and maintain robust internal compliance programs. These programs outline the mechanisms a firm uses to ensure adherence to FINRA rules and federal securities laws. A well-structured compliance program helps firms manage risks and uphold investor protection.

Written Supervisory Procedures (WSPs)

A cornerstone of any internal compliance program is the development of Written Supervisory Procedures (WSPs). These detailed internal rules and guidelines explain how employees must conduct business and how the firm supervises their activities. WSPs serve as a comprehensive roadmap for day-to-day operations.

Compliance Officers

Firms designate Compliance Officers responsible for overseeing and managing the firm’s compliance efforts. These officers ensure that the firm’s policies and procedures are current, effective, and properly implemented. Their role involves understanding regulatory requirements and their application to the firm’s operations.

Training and Education

Ongoing training and education are important for all employees on FINRA rules, internal policies, and ethical conduct. Regular training sessions keep employees informed about regulatory updates and reinforce the importance of compliance in their daily tasks. This continuous learning helps to embed a culture of compliance throughout the organization.

Record-Keeping

Accurate and complete record-keeping is a component of internal compliance programs. Firms must maintain records of all business activities, including customer accounts, transactions, and communications. These records must be readily accessible and preserved for specific periods, typically three to six years, depending on the type of record.

Internal Reviews and Audits

Firms are required to conduct periodic internal reviews and audits to assess the effectiveness of their compliance programs. These assessments help identify any areas needing improvement and ensure the program remains responsive to evolving regulatory landscapes and business practices. Regular audits verify that the firm’s practices align with FINRA rules and identify potential compliance issues.

Enforcement Actions

When FINRA identifies non-compliance with its rules or federal securities laws, it investigates potential violations and takes disciplinary action. These enforcement actions uphold market integrity, deter future misconduct, and protect investors. The types of outcomes FINRA can impose vary depending on the severity and nature of the violation.

FINRA can impose monetary penalties, or fines, on firms or individuals found in violation. These fines can range from thousands to millions of dollars, penalizing wrongdoing and encouraging future compliance.

In more serious cases, FINRA may issue suspensions, which temporarily remove an individual or firm from the securities industry, preventing them from conducting business for a specified period. For the most severe infractions, FINRA can impose permanent bars, which permanently remove an individual from the securities industry.

Censures or reprimands are formal disciplinary actions that serve as official warnings for less severe violations. A censure becomes part of an individual’s or firm’s public record. FINRA may also order restitution or disgorgement of ill-gotten gains, requiring the return of money to harmed investors.