Why You Need to Worry About FINRA

Feeling Invincible is Ignorance to Reality

The Financial Industry Regulatory Authority is under the radar for many organizations. Being fully aware of the violations and their consequences can prevent unneeded issues. 

“It won’t touch us.” Such is the position of many organizations when it comes to the Financial Industry Regulatory Authority (FINRA). Rather than keeping FINRA firmly on their radar screen, these organizations downplay its power and their own vulnerability, believing themselves immune to the potential for violating FINRA rules and facing the consequences. However, gambling on this immunity is dangerous at worst and foolhardy at best, for several reasons.

1. The incidence of disciplinary actions remains on an upswing and is broadening in scope.

In 2016, FINRA successfully brought a total of 1,434 disciplinary actions against registered individuals and firms, up from a mere 173 in 2008. A record 27 of these disciplinary actions involved individual compliance officers, with at least one such action exemplifying FINRA’s heightened enforcement of such simple duties as updating industry registration forms to include current information. In this instance, Allen Holeman, the former chief compliance officer of Oppenheimer & Co. and now chief compliance officer of David Lerner Associates, was fined $10,000 and suspended for 30 business days for “willful” failure to disclose $116,000 in tax liens on his U-4 registration forms and on annual firm compliance questionnaires.

Additionally, as a result of its disciplinary actions, FINRA expelled 24 firms from the security industry last year. Twenty-six firms and 727 brokers were suspended from security industry participation during that same interval, with 517 individuals barred from associating with FINRA-regulated firms.

2. Financial repercussions for violations continue to increase.

In 2016, FINRA levied a record $176.3 million in fines and ordered $27.9 million in restitution to harmed investors. Of these fines, 29 exceeded $1 million, up from 23 in 2014 and 21 in 2015.

However, fines represent just the tip of the iceberg where the financial consequences of FINRA violations are concerned. Firms found to be in violation—intended or unintended—also incur significant expenditures related to customer loss and reputational damage. Additionally, there is the steep cost of marketing and public relations initiatives necessary for companies to repair their reputation and regain their position in the market.

3. The movement of money is becoming a national security issue, as well as a market regulation issue.

As a result of this development, FINRA is paying heightened attention to firms’ compliance with regard to anti-money laundering (AML) procedures and programs. FINRA’s actions in May 2016 against a broker-dealer for failures pertaining to AML procedures at two of its divisions demonstrate that it is indeed sharpening its AML teeth and is unafraid to use them.

Specifically, Raymond James & Associates Inc. (RJA) received a fine of $8 million and Raymond James Financial Services Inc. (RJFS) a fine of $9 million, both for failure to establish and implement adequate AML procedures. This FINRA alleged, rendered both divisions unable to properly prevent, detect, investigate and report suspicious activity for several years.

FINRA also claimed that the broker-dealer had failed to conduct the requisite due diligence and periodic risk reviews for foreign financial institutions and that its AML compliance officer (AMLCO), who was handed a separate $25,000 fine and a three-month suspension, had neglected to ensure that such reviews had been executed. The company’s failure to establish and maintain an adequate customer identification program (CIP) was cited as well.

4. Size doesn’t matter.

Flippancy as to the power of financial regulatory bodies, the importance of adherence to rules and the possible end results of noncompliance was doubtless a catalyst in the demise of such major financial industry players as Lehman Brothers and Arthur Andersen. There is no getting around the fact that just as “it” happened to them, “it” could happen to any other company in the market, regardless of size.

5. Customer expectations demand compliance.

The financial industry is built largely on trust. In following regulations set forth by FINRA and demonstrating that they are doing so, organizations engender that trust among their customers. Just as travelers would likely hesitate to patronize airlines that flout Federal Aviation Administration (FAA) regulations, customers will not feel comfortable conducting business with financial firms that do not take FINRA seriously.

In short, there is no denying that FINRA requires the support of the companies and industry it regulates. As such, it behooves leaders to remain abreast of developments in technology and to invest in updates of their companies’ technology to foster compliance. It is equally critical to hire and leverage the right human resources across all departments so that the proper procedures and modifications can be implemented as needed.

Think of FINRA as you do the referees who work the sidelines at sporting events. Everyone shouts at the men in black and white striped shirts, but they are needed to ensure the game continues as it should—and they can be neither ignored nor scoffed at any stage of the game.