The Financial Industry Regulatory Authority (FINRA) regulates the securities industry to protect investors in the United States. As a self-regulatory organization (SRO), FINRA oversees thousands of brokerages and exponentially more securities representatives, enforcing rules and regulations designed to promote fairness and integrity in the financial markets.
Financial firms operating within FINRA’s jurisdiction must understand and adhere to FINRA rules to foster client trust and avoid penalties and reputational damage.
This guide explores key aspects of FINRA compliance, focusing primarily on anti-money laundering (AML) regulations. We’ll explore the rules and best practices institutions should follow to maintain a robust compliance program and discuss the consequences of failing to comply with regulatory obligations.
Why FINRA Compliance Matters
FINRA’s rules aim to prevent fraud, manipulation, and other unethical practices that can undermine investor confidence and lead to financial losses. For firms that fail to take their compliance obligations seriously, the consequences can be severe, including hefty fines, legal action, and irreparable damage to their reputation.
One of the most critical areas of FINRA compliance is anti-money laundering (AML). Money laundering threatens the global financial system by facilitating crime, corruption, and terrorism. FINRA requires member firms to implement robust AML programs, including customer identification and verification procedures, ongoing transaction monitoring, and prompt reporting of suspicious activities.
A FINRA member firm that neglects its AML obligations risks violating FINRA regulations and exposing itself to potential criminal charges and regulatory action from other agencies, including the Financial Crimes Enforcement Network (FinCEN) and the Office of Foreign Assets Control (OFAC).
Which Businesses Must Comply With FINRA Rules?
FINRA requires firms dealing in securities to be members. Membership is not voluntary; it is a regulatory requirement. FINRA compliance standards extend to financial firms and securities industry professionals. It primarily regulates broker-dealers, firms that deal in stocks, mutual funds, bonds, and other investment products, whether on behalf of customers or the firm’s own account.
Registered brokerage firm representatives in investment banking and securities must also be registered. While held accountable to a somewhat different set of rules, other entities that fall under FINRA rules include capital acquisition brokers and funding portals for securities offered or sold through crowdfunding.
It’s important to note that FINRA’s remit does not extend to all financial institutions. It is limited to the securities industry and does not include sectors such as banking or insurance. However, many firms operate across multiple sectors and may be required to comply with regulatory requirements from other agencies.
Key FINRA Rules for Compliance
FINRA publishes many rules covering duties, financial and operational behaviors, order and transaction reporting, and more. We can only highlight a few rules here, but the following are among the most important.
Rule 3310 – Anti-Money Laundering Compliance Program
Rule 3310 requires FINRA member firms to develop and implement a comprehensive AML compliance program that includes:
Written policies and procedures to detect and report suspicious activity
Ongoing training for relevant personnel
Independent testing of the AML program
Designation of an AML compliance officer
Firms must tailor their AML programs to their specific business activities and risk profile, considering customer base, geographic location, and product offerings.
Rule 3110 – Supervision
Effective supervision is a cornerstone of FINRA compliance. Rule 3110 requires firms to establish and maintain a supervisory system that is reasonably designed to achieve compliance with applicable securities laws and regulations.
Key requirements include:
Designating qualified supervisors for each type of business activity
Conducting annual compliance reviews
Investigating red flags and customer complaints
Documenting supervisory activities
Firms must also ensure that their supervisory personnel are adequately trained and have the resources and authority to carry out their responsibilities.
Rule 2210 – Communications with the Public
Rule 2210 governs how firms communicate with the public through advertising, sales literature, social media, and other marketing materials.
Key requirements include:
All communications must be fair, balanced, and not misleading
A registered principal must approve certain types of communications before use
Communications must be retained for a specified period
Specific disclosures may be required depending on the type of communication
Firms must have written supervisory procedures in place to ensure that all communications with the public comply with Rule 2210.
Rule 2090 – Know Your Customer
The “Know Your Customer” (KYC) rule requires firms to use reasonable diligence to obtain essential facts about every customer, including their financial situation, investment experience, and investment objectives. This information is critical for making suitable investment recommendations and detecting potential money laundering activities.
Rule 2111 – Suitability
FINRA Rule 2111 requires firms and their registered representatives to have a reasonable basis to believe a recommended transaction or strategy is suitable for the customer based on their investment profile. Factors that must be considered include the customer’s age, finances, experience, and risk tolerance.
Compliance with the Suitability Rule depends on adequate customer information, so Rules 2090 and 2111 are closely intertwined, as is discussed in FINRA Rules 2090 and 2111: A Comprehensive Guide.
AML Best Practices for FINRA Compliance
To comply with FINRA anti-money laundering rules, firms must adhere to AML best practices. Here are some key AML compliance steps every firm should consider:
Conducting a comprehensive risk assessment: Implement a risk scoring system specific to your business and industry, based on customer base, geographic exposure, and product offerings. Risk assessment should inform the design and implementation of the firm’s AML program.
Implementing robust customer due diligence: Collect and verify detailed customer information, including identity, source of funds, and expected account activity. This can be streamlined for accuracy and efficiency with a robust identity verification and KYC software solution. Enhanced due diligence solutions may be needed for high-risk customer profiles.
Leveraging technology: Consider investing in automated transaction monitoring systems and regulatory reporting software to help detect and report suspicious activity more efficiently and effectively.
Providing ongoing training: Provide regular AML training to ensure relevant personnel understand their responsibilities and can identify red flags.
Collaborating with other stakeholders: Firms should work closely with law enforcement, regulators, and industry peers to share information and best practices related to AML compliance.
FINRA Compliance with Alessa
FINRA compliance is a complex and ever-evolving challenge for financial firms. Alessa’s modular anti-money laundering platform can help you implement robust AML programs to avoid costly penalties and reputational harm. Alessa provides a comprehensive range of anti-money laundering and combating the financing of terrorism (AML/CFT) tools, including:
Contact our AML compliance experts today to learn how Alessa can streamline and optimize your business for AML and FINRA compliance.
