Fines are Sky Rocketing, Make Preparations While You Can
The prospect of record-breaking fines for noncompliance with regulations set by the Financial Industry Regulatory Authority (FINRA) continues to loom large for financial organizations and their CEOs. Executives should take a proactive approach to dodging the FINRA fines bullet. Read on for five practical compliance strategies.
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Go Back to Basics
CEOs—and other executives of financial products and services firms, for that matter—tend to grow flustered when thinking about avoiding FINRA fines. They worry about whether they are addressing the right areas first and if their companies have the tools and technology necessary to achieve compliance. The more they try to determine answers to these questions, the more confused they become.
However, there is a better approach. It involves a return to the basics: simply taking a look at what FINRA wants financial firms to do—i.e., to maintain high-caliber, legally defensible records of their activities and communications with customers—and doing it. CEOs must step back and think about what their organization should be doing, and why—irrespective of technology. The objective of this approach is not merely to steer clear of financial repercussions for failure to comply with FINRA regulations, but to earn the trust and confidence of the financial community. CEOs who eschew simplicity here will only find themselves—and their organizations—falling down the rabbit hole, so to speak.
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Consider FINRA’s Top Enforcement Issues
As a complement to zeroing in on the basics mentioned above, one should know in which areas FINRA is focusing its enforcement efforts and levy the bulk of fines. In 2016, these areas included money laundering, variable annuities, trade reporting, books and records and unregistered securities.
Money laundering merits particular attention, given the ever-closer link between matters of national security and financial trust. International crime and tax evasion are an increasing concern, and companies’ compliance or lack thereof with anti-money laundering (AML) requirements will, therefore, become more of a focus. This is especially so because financial crime is easier to track and investigate than many other activities. Nefarious actors can communicate using covert means, but the money must move in some way—and it is not difficult to see how.
Still, more can be done with technology in order to support AML efforts. Technology options for addressing money laundering are expanding rapidly, and a focus on this area should include making room in the budget for that technology.
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Address the Gap Between Requirements for Regulatory Compliance and the Human Resources Available to Handle Them
The number of mandates set forth by FINRA and other regulatory agencies continues to grow and their scope continues to broaden. Clearly, CEOs cannot sanction the expense of expanding their companies’ workforces to fully accommodate such change.
Significant investment is now being made in the area of governance risk and compliance from a technology development perspective. Many financial organizations are earmarking funds for these solutions. CEOs should keep an eye on the governance risk and compliance technology stack. Sketching out potential deployment options now will ensure that their companies do not become the last to adopt the necessary tools, which could make them more prone to violating FINRA’s rules, even inadvertently.
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Ensure Thorough Documentation of Customers’ Web-based Journeys
FINRA regulations stipulate that companies must capture information about and retain records of their customers’ journeys as they research financial products and make financial decisions on company websites. It is incumbent on CEOs to ensure that such documentation is comprehensive, boosting the trust and confidence of the financial community and making any details requested by FINRA in the course of an investigation readily available to examiners. The key: recording and archiving not only customers’ access to product/service descriptions along with terms and conditions but also their use of online investment calculators and other interactive web features.
Vigilance in archiving every aspect of and step in customers’ journeys is especially important given companies’ need to cater to an ever-expanding cadre of “digital natives.” These customers expect—if not demand—that financial firms leverage sophisticated digital assets to share information about their offerings.
Moreover, by supporting the practice of archiving every customer journey from start to finish, CEOs help to foster their companies’ compliance with the newest version of the Markets in Financial Instruments Directive (MiFID 2). MiFID 2 also mandates recordkeeping when it comes to the steps customers take as they learn about and decide on financial products. The directive went into effect across the European Union (EU) on January 3, 2017, and applies to both financial services companies based in Europe and U.S. firms that maintain operations in the EU.
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Avoid Being Lulled into Thinking that FINRA and Other Regulatory Agencies are Not Serious About Compliance
Focus on compliance tends to occur in waves that crest when high-profile cases concerning violations come to light and recede at other times. Nonetheless, a degree of vigilance is always good practice.
Financial firms now have access to many tools that facilitate such vigilance. In recent years, there has been a shift toward cloud-based tools. These tools are easy to sign up for and belong to an ecosystem of solutions that integrate with each other; as a result, they are easier to use than their standalone counterparts. When making technology investments to enable such vigilance, CEOs should ensure that their chosen tools include eDiscovery capabilities.
Not all FINRA fines can be avoided. However, applying the five strategies outlined above is a giant step in the right direction.
Kevin Gibson is CEO & Chairman of 
