What FINRA Sanction Updates Mean for Your Financial Firm
If you’re in finance, then you probably know that FINRA has recently updated its guidance on sanctions. While a lot of it can be pretty dry reading, it’s necessary to understand so you can get your own compliance department on board. The new changes to FINRA could put firms at increased liability if they’re not updating their corporate culture accordingly.
As the specific area being updated is within the sanctions FINRA imposes, firms need to know where their risk lays in their organizations. FINRA’s guidance is designed to help firms by letting them know what to look for. Gauging your firm’s risk level and keeping employees informed of the changes will go a long way towards mitigating any potential FINRA violations.
What FINRA’s Changes Mean for Your Firm
FINRA’s changes are based on an annual review by the National Adjudicatory Council, which is tasked with clarifying laws and updating policies as the regulatory environment changes. The most recent review occurred in April of 2017. While the results were more than 100 pages long, there are two major areas in particular that firms need to be aware of, as they may require policy changes:
- Undue influence equals higher sanctions – It’s been established that vulnerable individuals need additional protection from unscrupulous financial advisors and representatives. As such, in instances where it’s found that an individual used their position to exert undue influence over a vulnerable person to violate FINRA’s policies, additional sanctions will be imposed. So, for example, a financial advisor who uses his client’s Alzheimer’s to manipulate the man into investing money would be guilty of exerting undue influence. This would be an additional separate sanction imposed on top of the other charges.
- Increased supervisory responsibility – While FINRA’s position on employer liability by association is generally applied at a lower level, it has now added a category for sanctions where there are system-wide violations. It’s designed to target companies whose bad practices are so prevalent that they’ve become part of a standard business operating procedure. For this, consider the recent case of JPMorgan, who faced bribery sanctions in China. The issue there was that the company’s employee referral program was being used to bribe foreign officials by giving their children jobs in exchange for contracts. This was a system-wide issue that this new change is designed to stop.
These two changes need to be highlighted, as these are where your increased risks lie. If employees are found to be exerting undue influence, or if the company culture has taken a bad turn, FINRA is looking deeply. The policy updates tell us these are the areas FINRA is concerned about, so they should be the areas you’re concerned about as well.
Staying in Compliance and Avoiding Sanctions
One big takeaway we can get from these updates is that FINRA is putting increased responsibility on the employees and the companies that manage them. Willful ignorance and company policy are no longer valid defenses in a FINRA violation. To ensure your firm complies, consider the following:
- Recalibrate your firm’s risk assessment – An update in sanctions should indicate that it is time to do a risk assessment of your workforce, so you can tell who is already in compliance and who may be lagging. You can use Remote Risk Assessment (RRA) as a tool to scrutinize employees in the areas of company policy and ethics, essentially getting a risk heatmap of your firm. This will help you determine where your highest areas of concern lie, so those areas can get updated training first.
- Schedule retraining workshops – Specifically, a workshop should be focused on FINRA’s undue influence standard. This should help employees understand what undue influence is and how to avoid using it, even in cases where it may be unintentional. Specifically, go over concerns particular to vulnerable clients and how to manage them.
- Update firm-wide policies – The new standard for firms that have bad policies which are widespread will mean that your own policies bear further scrutiny. This would be a good time for upper management to review their best practices, as well as any employee incentive programs that could be used inappropriately.
- Provide written updates – Even after workshops, employees who are subject to FINRA regulations should receive a printout of these updated standards from your compliance department. That way, employees will have these standards in writing as part of the overall compliance manual.
- Review any outstanding cases – While these sanctions will be applied going forward, this is the time to do an audit of any existing FINRA violations to ensure that you don’t have current problems. If you already have a case pending that could be considered a concern under the new guidance, this is the time to change company procedure.
FINRA’s updated guidelines are designed to protect vulnerable individuals while preventing toxic corporate cultures. To ensure compliance in your firm, keep employees informed and take your company’s risk temperature.
AC Global risk offers RRA as a risk calibration tool. Our technology allows you to get a fast, honest assessment of your employees so you can find areas of concern and correct them. For more information, contact us.
Image Source | Unsplash user Tobias S.