What Is FINRA Compliance? Key Requirements & Responsibilities

Javed Shah

FINRA compliance is a series of requirements that apply to financial brokers and their representatives meant to ensure that they adhere with anti-fraud laws. FINRA guides critical anti-fraud measures and their implementation through cybersecurity and identity verification controls that governed entities must implement. FINRA compliance is, therefore, crucial for any financial institution.

What Is the Financial Industry Regulatory Authority (FINRA)?

The Financial Industry Regulatory Authority is a Self-Regulatory Organization (SRO) that oversees brokerage firms and their registered representatives in the U.S. It was established in 2007 as a result of the merger between the National Association of Securities Dealers (NASD) and the regulatory and enforcement arm of the New York Stock Exchange (NYSE). Although it is not a government agency, FINRA operates under the supervision of the U.S. Securities and Exchange Commission (SEC). Any disputes regarding compliance with these rules will often run through both FINRA and the SEC.

FINRA’s primary responsibility is to protect investors and maintain the integrity of the securities markets with rules governing the conduct of brokers and dealers and by examining firms for compliance with those rules. In addition to rulemaking and enforcement, FINRA provides education and training programs for financial professionals, arbitrates disputes between investors and brokers, and offers resources to help investors make informed decisions.

As such, FINRA rules will touch on several different domains affecting securities-related professionals. These include:

  • Licensing: Ensuring that brokerage firms and their representatives are properly registered and licensed to operate in the securities industry.
  • Communications: Guarantee that promotional materials and communications with the public are truthful, accurate, and not misleading.
  • Recordkeeping: Requiring that brokerage firms maintain accurate records of transactions, client information, and other relevant documentation.
  • Legal Enforcement: Identifying potential market manipulation, insider trading, and other violations of securities laws and regulations.

Firms and individuals who fail to comply with FINRA’s rules and regulations may face disciplinary actions, fines, suspensions, or even expulsion from the securities industry.

What Are FINRA Requirements?

FINRA compliance requirements cover a broad range of areas to ensure the integrity and fairness of the financial markets and the protection of investors. While it is not possible to list every specific requirement here, some critical aspects of FINRA compliance include:

  • Registration: Brokerage firms and their representatives must be registered with FINRA and obtain appropriate licenses (such as Series 7 and Series 63) to conduct securities business. Firms must also ensure that their representatives meet continuing education requirements.
  • Supervision: Brokerage firms must establish and maintain written supervisory procedures to ensure compliance with securities laws and regulations. This includes designating responsible individuals (such as a Chief Compliance Officer).
  • Advertising: Promotional materials, including advertisements and public communications, must be accurate. Firms must have procedures to review and approve these materials before distribution.
  • AML and KYC Laws: Firms must ensure adequate information about their clients’ financial situations, background information, and risk tolerance. Additionally, brokerage firms must establish AML programs that include written policies, procedures, and controls to detect and address potential or ongoing money laundering activities. This includes identifying potential criminals before they become customers as well as addressing customer account takeover of legitimate customers.
  • Documentation and Surveillance: Firms must keep secure records of all transactions and maintain systems that monitor those systems for evidence of tampering, manipulation, or insider trading.
  • Cybersecurity: Firms must develop and maintain business continuity plans to ensure the ongoing operation of their business in the event of significant disruption. They must also implement cybersecurity measures to protect client information and the integrity of their systems. This includes standard security controls like account management, authentication services, access controls, reporting and audit tools, and multi-factor authentication.

It’s important to note that these are just some of the main areas of FINRA compliance. The specific requirements for each firm may vary based on factors such as its size, the nature of its business, and the types of products and services it offers.

FINRA and KYC Laws

FINRA’s KYC requirements are part of Article 2090 of FINRA, titled “Know Your Customer,” which mandates that all members must conduct reasonable due diligence about their customers. This due diligence includes “essential” facts about that customer, from personal identification to a financial situation.

Key elements of the KYC process under FINRA’s framework include:

  • Customer Verification: Brokers must verify the identity of their clients. This practice typically involves collecting personal information such as name, date of birth, address, Social Security or Tax Identification number, and other identification documents.
  • Customer Due Diligence: Brokers must gather information about the client’s financial situation, investment experience, risk tolerance, investment objectives, and time horizon. This process may involve asking detailed questions and reviewing relevant documents, but it must occur before the brokers provide consulting or strategic services.
  • Ongoing Monitoring: Brokers must continuously monitor their clients’ accounts, mainly when there are changes in the client’s financial situation, investment objectives, or risk tolerance. Additionally, this monitoring must include controls around unexpected or suspect behavior that might point to fraud or money laundering activity.
  • Recordkeeping: Firms must maintain records of the information collected during the KYC process and any client profile updates.

Adhering to KYC requirements not only helps brokerage firms comply with FINRA rules but also assists in meeting other regulatory requirements such as AML and combating the financing of terrorism operations.

What’s the Relationship Between FINRA Compliance and the Customer Identification Program (CIP)?

The Customer Identification Program is a crucial component of the broader regulatory compliance framework for financial institutions in the United States, including brokerage firms overseen by FINRA. CIP requirements are mandated by the USA PATRIOT Act and enforced by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), with FINRA being responsible for examining and ensuring compliance among its member firms.

The CIP is designed to help financial institutions verify the identity of their customers, prevent fraud, and combat money laundering, terrorism financing, and other illicit activities. FINRA member firms must establish and maintain a written CIP compliant with the USA PATRIOT Act and related regulations.

Key FINRA requirements for CIP include:

  • Identity Verification: Firms must obtain specific information from customers when opening an account, such as name, date of birth, address, and identification number (Social Security number for U.S. persons or other government-issued identification numbers for non-U.S. persons). In some cases, firms may require additional information or documentation.
  • Customer Notices: Firms must provide customers with clear and conspicuous notice, either in writing or electronically, that they are requesting information to verify their identity as federal law requires. This notice must be given before the account is opened or at the time of account opening.
  • Government Lists: Firms must have procedures in place to determine if a customer appears on any list of terrorists or terrorist organizations provided by the federal government.
  • Risk: Firms must develop risk-based procedures, considering various factors such as the types of accounts offered, the methods used to open accounts, and the firm’s size and customer base.

It’s important to note that the CIP requirements are just one aspect of a firm’s broader compliance obligations under FINRA and other applicable regulations, such as anti-money laundering (AML) and Know Your Customer (KYC) rules.

What Are Best Practices for Meeting FINRA Requirements?

Like any other framework, FINRA has a few best practices that companies can adhere to. While there aren’t specific technological requirements to meet, there are basic functionality that must be present. Thus, following these best practices will help you meet requirements:

  • Identity and Access Management: It’s critical that governed entities have systems and processes in place to verify user identity (based on KYC and AML laws) for either background or authentication management. Alongside this, authentication systems should include MFA and include additional controls to protect against unauthorized access (such as following the principle of least privilege).
  • Liveness Proofing: For more advanced ID verification and security, organizations can, and should, use liveness proofing through biometrics to strengthen their authentication and verification approaches.
  • Record Security: A necessary aspect of FINRA is protecting user information, specifically financial records and behaviors, from outside interference. This can play a role in monitoring efforts for AML compliance. As such, encryption, perimeter security, and auditable systems are important.

Support FINRA Due Diligence with 1Kosmos BlockID

There’s quite a bit that goes into adhering to FINRA requirements. Security, identity verification, and authentication are at the core of these standards, and any financial institution will touch on them thousands of times daily.

With 1Kosmos BlockID, you can support your compliance efforts with the following features:

  • Identity-Based Authentication: We push biometrics and authentication into a new “who you are” paradigm. BlockID uses biometrics to identify individuals, not devices, through credential triangulation and identity verification.
  • Cloud-Native Architecture: Flexible and scalable cloud architecture makes it simple to build applications using our standard API and SDK.
  • Identity Proofing: BlockID verifies identity anywhere, anytime and on any device with over 99% accuracy.
  • Privacy by Design: Embedding privacy into the design of our ecosystem is a core principle of 1Kosmos. We protect personally identifiable information in a distributed identity architecture and the encrypted data is only accessible by the user.
  • Private and Permissioned Blockchain: 1Kosmos protects personally identifiable information in a private and permissioned blockchain and encrypts digital identities and is only accessible by the user. The distributed properties ensure no databases to breach or honeypots for hackers to target.
  • Interoperability: BlockID can readily integrate with existing infrastructure through its 50+ out-of-the-box integrations or via API/SDK.
  • SIM Binding: The BlockID application uses SMS verification, identity proofing, and SIM card authentication to create solid, robust, and secure device authentication from any employee’s phone.

Sign up for our newsletter to learn more about how BlockID can support real security and help mitigate phishing attacks. Also, make sure to read our whitepaper on how to Go Beyond Passwordless Solutions.

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Meet the Author

Javed Shah

Former Senior Vice President Of Product Management

Javed has spent his entire twenty year career designing and building blockchain and identity management solutions. He has led large customer facing pre-sales teams, led product management for identity management platforms like the ForgeRock Identity Platform and the ForgeRock Identity Cloud. Javed has an MBA from UC Berkeley.