The Financial Industry Regulatory Authority (FINRA) regulates 3,600 member firms and nearly 630,000 registered reps and conducts over 2000 member firm examinations each year. FINRA conducts routine examinations of broker-dealers checking for compliance with industry rules and regulations. Depending on the firm, these routine investigations (or more commonly referred to as FINRA audits) occur once every one to four years. 

The increasing cost of compliance – in time and money – is something broker-dealers face every day. It only takes one big fine for a broker-dealer to realize that it needs to be better prepared for audits.

FINRA Audit Guide

FINRA Compliance Trends

The 2018 Report on FINRA Examination Findings (the second annual report) centers on selected observations from recent examinations that the organization deems noteworthy because of their “potential significance, frequency, and impact on investors and the markets.” Main areas of focus include suitability for retail customers (FINRA Rule 2111), fixed income mark-up disclosure, reasonable diligence for private placements, and abuse of authority. Deficient written supervisory procedures (FINRA Rule 3110) continue to be a common issue as well.

FINRA reported a total of $61 million in fines in 2018. Although a slight decrease from $65 million in 2017, the average fine per action filed increased from $47,407 in 2017 to $66,232—a 40% increase.

Top Enforcement Issues of 2018

According to analysis performed by Eversheds Sutherland, the top enforcement issues of 2018 measured by total fines assessed include:

AML Fines

Suitability Fines

Variable Annuity Fines

Prepare for FINRA Audits

According to FINRA’s 2019 Examination Priorities Letter, highlighted areas of focus consist of online distribution platforms, fixed income mark-up disclosure, and regulatory technology. Additionally, core issues such as suitability, AML, and supervisory policies and procedures (FINRA Rule 3110) are top priorities.

The time between audits, internal or external, is an ideal window for improving compliance efforts. Without regulators looking over their shoulders, broker-dealers can first determine their actual costs of compliance – in terms of dollars and employee hours – and then determine what investments should be made in software, training, consultants, and extra testing.

Four key areas that will help firms prepare for an audit:

  1. Utilizing FINRA resources
  2. Investing in software
  3. Testing often
  4. Promoting a compliance-friendly culture

With these investments, the next FINRA examination will be what it should be: a constructive opportunity that points the firm in the direction of improved compliance, better long-term customer relationships, and larger long-term profits.

FINRA Audit Guide

Newsletter Sign Up

Thank you for subscribing!

Share This