Insights

15 January 2024

FINRA Sounds Alarm on Persistent Compliance Failures: Key points

FINRA recently published its yearly review showing where stock trading firms slip up on protecting customers. The report is a deep dive into regulatory areas the agency will be scrutinizing in depth throughout the year, with several new areas brought into sharp relief. Here’s MBK Search’s high-level summary for governance and compliance teams.

Get Way More Serious About Emergency Cash Reserves

FINRA spotted brokers guessing wrong on how much extra collateral they would need to put up with clearinghouses during market plunges. Firms must “implement governance” and assign executives to create emergency cash access blueprints detailing the exact loan sources they would tap. The document also requires preparing managers for rushing capital to struggling clients.

Better Check All Those Spreadsheets and Models

Many brokers were penalized for entering bad data. Now examiners want proof that brokerages double-check accuracy by comparing error flags across reports and confirming numbers match software formulas. Don’t forget sales practice alerts either – the report notes a firm was penalized after its “option prices…varied significantly” from market costs when calculating a margin account’s risk level.

No More Stalling on Past Audit To-Do Lists

Tired of brokers promising changes but never following through, FINRA is now investigating “whether internal enhancement implementation” happened after previous audits. All future issues must have an assigned “post-audit issue owner” who attaches status reports to every corrective action showing the C-suite signed off on finished improvements.

Major Hazards Still Lurk Within Crypto Activity

Warning “fraud, volatility and technology dependencies innate to the sector,” FINRA fined several crypto commerce players for thin oversight. Firms inactive in crypto still shared compliance responsibility when workers traded coins in outside accounts without approval or when affiliates mingled brokerage assets with virtual tokens. The agency also continues targeting misleading promotions downplaying crypto risks. One 2022 sweep saw bad marketing materials in almost half of files.

Overall the report provides a regulator wake-up call to tone up governance with 42 documented weak spots. Brokers must now fortify supervision around emerging technologies, sales practices and data flows to align with higher industry standards. You can download the full report from FINRA’s website.

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