6 Tips for Complying with FINRA
Complying with the Financial Industry Regulatory Authority (FINRA) helps you hire and manage your workforce while protecting customers. Whether your organization hires individuals with direct or indirect customer contact in a bank, broker-dealer, insurance, or financial service advisory firm, staying up-to-date with FINRA requirements will help you avoid hefty penalties and potential lawsuits.
The Importance of Complying with FINRA
As an independent non-governmental organization, FINRA oversees brokerage firms and exchange markets on behalf of the Securities and Exchange Commission (SEC). It is authorized by the U.S. Congress to regulate financial services activities, with the primary objective of protecting investors from fraud and illegal financial transactions.
FINRA regulates transactions made by over 600,000 brokers and the 3,500-plus organizations employing them. Organizations conducting transactions or engaging in other activities in violation of FINRA rules can face fines and other penalties. For example, in 2018, FINRA took the following punitive actions:
- Brought 921 disciplinary actions against registered brokers and firms for unethical behavior
- Levied $61 million in fines
- Ordered $25.5 million in restitution to harmed investors
- Referred more than 900 fraud and insider trading cases to the SEC and other agencies for litigation or prosecution
Similar to other laws affecting your hiring activities, even unintentional FINRA violations can put your organization at risk for regulatory penalties. To take all necessary actions to protect your organization and its customers, you will need to regularly examine your hiring and talent management practices for compliance with FINRA.
Six Tips for Complying with FINRA
The daily actions of your employees impact the financial well-being of your clients, many of whom are not well-informed about their investments. A recent FINRA survey found two-thirds of U.S. adults who own investment accounts performed poorly (scored 50 percent or less) on a quiz of investor knowledge. To make sure your employees are taking all necessary actions to protect your customers—and their assets—it’s important to comply with FINRA rules. Take these six steps to make sure you incorporate FINRA requirements into your hiring and talent management processes.
Use compliance tools provided by FINRA
Like most regulatory bodies, FINRA provides resources and tools to help you understand your compliance obligations as an employer. Helpful tools offered by FINRA include:
- FINRA Compliance Calendar: Features month-by-month requirements for FINRA filings, deadlines, certifications, and conferences
- Peer-2-Peer Compliance Library: Shares materials distributed at FINRA events by FINRA-registered firms
- Weekly Update Emails: Email subscriptions keep firms up-to-date on regulatory changes and FINRA news
Understand FINRA background check requirements
Background checks help your organization make well-informed hiring decisions. They also help you avoid the penalties of insufficient background screening. FINRA recently fined a large financial services firm $1.25 million for hiring three convicted criminals over seven years and failing to run adequate background checks on more than 10,000 employees.
FINRA protects consumers by making sure banks and other financial institutions hire only those individuals who are permitted to work in a financial services environment. Thus, FINRA requires registered firms to conduct background screening of prospective hires.
Conducting financial services background checks requires staying current with new and enhanced FINRA rules. In 2015, FINRA Rule 3110 required all member firms to conduct background verifications for new hires and transfers from other firms. Rule 3110 also required organizations to have documented procedures for collecting information and conducting background checks. Later, In 2018, FINRA issued new guidance for an enhanced background check process. This update expanded access to public records of FINRA-registered individuals seeking employment with financial services firms.
Conduct thorough background checks on all prospective hires
Background checks aren’t necessary just for FINRA-registered employees. Other individuals may have employment sanctions or activities in their background you should know about before hiring them.
Avoiding high-risk hires in any function can protect the organization from increased regulatory scrutiny, possible increased litigation, and reputational damage. In 2020, the Chief Compliance Officer of a financial services firm was personally fined $5,000 and suspended by FINRA for 30 days for non-compliant record-keeping practices.
In addition to a criminal history search and fingerprinting, a thorough financial services background check includes searches for employment exclusions or other issues impacting a hiring decision. These searches will help you identify individuals prohibited from working in a financial services firm or conducting certain activities.
Background screening for financial services hires should include a search of the following databases and lists:
- Department of Insurance License Verification (by state): Check the status or expiration of an insurance license based on the agent and his or her state.
- U.S. Treasury Office of Foreign Asset Control (OFAC): Learn whether an individual or organization is prohibited from conducting business or from an embargoed country or region.
- Securities and Exchange Commission (SEC): Obtain information about a company’s operations and financial information.
- FINRA BrokerCheck: Get a list of investment-related licensing information and disclosures, and learn if an individual is barred from acting as a broker.
- National Association of Securities Dealers Central Records Depository (NASD-CRD): Gain information about a broker’s employment history, approved registrations, and disclosures.
- Global Sanctions and Watch List: Get information about individuals and entities who cannot be employed due to Patriot Act restrictions.
Have a clear policy for employee social media activity
FINRA-regulated activities can extend beyond trading and brokerage transactions. Some of your employees’ social media activities can be considered marketing and advertising, and are also regulated. FINRA fined a securities analyst $15,000 for using Twitter to express opinions about securities, without revealing that he owned them.
Complying with FINRA includes developing a social media policy and outlining prohibited activities for employees. In your policy, make sure you provide employees with examples of prohibited activities. You can also provide resources and training to help employees keep their social media activities in compliance with FINRA rules and your policy.
Enforce FINRA compliance among the workforce
FINRA requires registered firms to “establish a formal training program to keep covered registered persons up to date on job- and product-related subjects.” While the size and structure of the training program are up to you, the training should include well-defined processes and procedures to drive compliance with FINRA requirements. You will also need to reinforce the training by offering sessions regularly and taking action when employees violate FINRA rules, including reporting wrongdoing and taking disciplinary action.
In addition to offering training, you also need to give employees time to complete FINRA continuing education requirements, which includes classes they must take every three years. In these classes, registered representatives stay informed about FINRA rules for recordkeeping, marketing, and regulated broker-dealer activities.
Stay prepared for regular FINRA audits
All registered financial services firms are subject to FINRA audits, also called examinations. FINRA examinations review the activities of registered firms as frequently as annually in some cases. You should always be prepared for an audit, which will check for the following:
- Fair trading and brokerage practices
- Transparent and honest marketing materials
- Current registrations for each broker you employ
To be ready for an audit, you’ll have to make sure all brokers are up-to-date with their industry education and registrations. This includes managers who are not full-time brokers. FINRA also regulates the activities of managers with the ability to trade up to 20 percent of a stock.
Prioritize FINRA Compliance in Hiring and Talent Management Processes
Complying with FINRA is necessary for the effective operation of your organization, but it doesn’t have to slow down your hiring process or make it less effective. By following these tips, you can meet your hiring objectives and have a background screening and hiring process with FINRA compliance at its core.
An excellent way to stay on top of FINRA and other regulatory requirements is to routinely review your background screening process for compliance and efficiency. Read our Guide to Auditing and Improving your Background Screening Program to learn more.