FINRA

Overview FINRA record keeping FINRA trade and communications surveillance

FINRA - Protecting U.S. investors

The goal of FINRA is to protect investors and ensure the financial market’s integrity. FINRA is a Self Regulatory Organization (SRO), a government-authorized not-for-profit organization that oversees U.S. broker-dealers. FINRA is authorized by Congress to protect America’s investors by making sure the broker-dealer industry operates fairly and honestly. The organization regulates Broker-Dealers, Capital Acquisition Brokers, and Funding Portals. FINRA generally has five main priorities:

That every investor receives basic protections they deserve
Anyone who sells a securities product is tested, qualified and licensed
Every securities product advertisement is truthful, and not misleading
Any securities product sold to an investor is suitable for that investor's needs
Investors receive complete disclosure about the investment product before purchase

FINRA Oversight

In order to ensure the integrity of the U.S. financial system, FINRA, working under the supervision of the Securities and Exchange Commission (SEC):

Writes and enforces rules governing the ethical activities of all registered broker-dealer firms and registered brokers in the U.S.
Examines firms for compliance with those rules
Fosters market transparency
Educates investors

Overview of FINRA record keeping rules

As an arm of the SEC, FINRA is responsible for enforcing compliance by its members and associated persons with the SEC books and records rules applicable to broker-dealers, and the Municipal Securities Rulemaking Board ("MSRB") record keeping rules. Additionally, FINRA has its own record keeping rules.

FINRA record keeping rules:

FINRA Rule 2210(b)(4): Communications with the Public Learn more >
FINRA Rule 2241(d)(3): Research Analysts and Research Reports; Disclosure in Public Appearances Learn more >
FINRA Rule 2360(b)(23)(C)(iii): Options Requirements; Tendering Procedures for Exercise of Options; Allocation of Exercise Assignment Notices Learn more >
FINRA Rule 5130(b): Restrictions on the Purchase and Sale of Initial Equity Public Offerings; Preconditions for Sale Learn more >

FINRA Rule 4511

Requires firms to:

Make and preserve books and records as required under the rules of FINRA, the Securities Exchange Act of 1934 (SEA) and the applicable SEA rules
Preserve the books and records required to be made pursuant to the FINRA rules in a format and media that complies with Securities and Exchange Act Rule 17a-4
Rule 4511 also requires firms to retain books and records for a period of at least six years for which there is no specified retention period

FINRA record keeping requirements cont.

Written supervisory procedures

In addition to the above rules, FINRA Rules 3110 and 3120 require firms to establish, maintain and enforce supervisory systems and written supervisory procedures reasonably designed to comply with their record keeping obligations.

Supervisory controls

Regulated firms are also required to periodically review and update their record keeping written supervisory procedures and to have appropriate written supervisory controls to test and verify that those procedures are reasonably designed to comply with applicable record keeping laws and regulations and to update or amend them if necessary.

Communications

Broker-dealers must retain originals of all communications received and copies of all communications sent by the broker-dealer relating to its "business as such" for at least three years, the first two years in an easily accessible place. This requirement applies to all electronic communications relating to the firm’s business, including emails and instant messages.

Use of third-party record keeping services

A broker-dealer may use a third-party record keeping service to maintain the broker-dealer's required records. However, the regulated firms are still responsible to oversee, supervise and monitor the record keeping service’s performance, and they must have in place specific policies and procedures to monitor the record keeping service's compliance with the terms of any agreements and assess the service's continued fitness and ability to perform the activities being outsourced.

What challenges do financial firms face with regard to Finra record keeping?

There are a number of broad challenges related to record keeping, regardless of the regulatory agency rules.

FINRA Record keeping challenge 1: Identifying which records need to be retained

One of the first and biggest challenges relates to being able to identify which records need to be retained and produced. Building the inventory of records requires an understanding of which products/services the institution operates within, and then based on this, which rules and records are within scope.

FINRA Record keeping challenge 2: Keeping up with new rules

In addition, new record keeping rules require institutions to review any new requirements and assess whether improvements in technology are required to meet minimum standards for FINRA record keeping. This can be costly in terms of both time and money.

FINRA Record keeping challenge 3: Growing data volumes

Another challenge includes the volume of data and the complexity of technologies. The sheer amount of data institutions are faced with capturing and retaining creates a serious challenge as far as what is to be collected and how to retain it.

FINRA Record keeping challenge 4: Archiving and monitoring employee communications

Financial institutions have faced increasing challenges surrounding the monitoring and record keeping of employee communications due to the increased use of digital communication channels. The Covid pandemic and a shift towards flexible working has increased those challenges since tracking and capturing communications that occur outside of the office is more challenging.

FINRA Prioritizing Books and Records in 2024

FINRA kicked off 2024 by releasing its Annual Regulatory Oversight Report, which aims to provide financial firms with key insights and observations from recent activities of FINRA’s regulatory operations.

FINRA dedicated a section of the report to guidance around books and records requirements, which included includes a list of relevant regulatory obligations, related considerations, findings from the past, and effective practices to ensure your firm remains compliant.

FINRA's 2024 Annual Regulatory Oversight Report covers 26 topics in total, including relevant rules, key considerations when building compliance programs, findings and observations from recent enforcement actions, and effective practices that can be leveraged in 2024 to ensure firms are utilizing effective supervisory procedures and controls when meeting their compliance obligations

Curious to know what is included in the report? Check out our summary of the key takeaways and insights.

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FINRA trade and communications surveillance

FINRA rules related to trade and communications surveillance refers to market manipulation rules, which fall under Rule 2020 and 5210.

As with other U.S. regulatory agencies, FINRA does not specify or prescribe the manner in which firms must perform communications and trade surveillance. However FINRA does require member participation in its Trade Reporting and Compliance Engine (“TRACE”) system which obligates members to submit transaction reports in TRACE-Eligible Securities in conformity with the Rule 6700 Series.

FINRA Rule 2020, "Use of Manipulative, Deceptive or Other Fraudulent Devices", prohibits members to “effect any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive or other fraudulent device or contrivance.”

Under FINRA Rule 3110, "Supervision", firms are required to establish and maintain a system to supervise the activities of its personnel in order to ensure compliance with the applicable securities laws and regulations and FINRA rules.

Under FINRA Rule 5210, "Publication of Transactions and Quotations", FINRA prohibits the publication of any transaction, buy or sell, unless it is believed that the transaction is a bona fide purchase or sale. Additionally, a member cannot quote a bid or ask price for a security unless it too is considered a bona fide bid or ask.

FINRA surveillance enforcement actions

Over the past couple of years, there have been a number of enforcement actions by FINRA related to market abuse violations. These include:

October 2022 - FINRA fines tier-one bank $2M for Best Execution Violations. Learn more >

July 2023 - FINRA fines prominent wealth manager $6M for longstanding AML program failures after the firm failed to report 1,500 suspicious activity reports. Learn more >

November 2023 - FINRA fines tier-one bank $24M for treasuries spoofing. Learn more >

What challenges do firms face in regard to FINRA trade and communications surveillance?

There are many challenges firm’s face related to trade and communications surveillance. Below sets out a few examples, however as many firms operate in different manners, additional challenges may present themselves, which will also need to be accounted for.

FINRA trade and communications surveillance challenge 1:
Broad definition of market manipulation

One of the biggest challenges the industry faces with respect to trade and communication surveillance is the broad nature of the rules themselves. The way in which the rules are written and with no prescribed way in which surveillance should be conducted, leaves FINRA with significant leeway to find violations of market manipulation rules.

FINRA trade and communications surveillance challenge 2:
Use of new communications

Widespread use of new communications, and in many cases unconventional methods, such as external apps, makes surveillance even more difficult for the firms. This is because communications on new channels either need to be captured or made prohibited through a corporate policy. But when a platform is banned, firms need to be able to identify intent among employees to, for example, start talking on this unmonitored channel to ensure policies are being adhered to. This can be done through lexicon searches for phrases like “let’s talk on WhatsApp”. However, a lot of surveillance technology is not up to date with modern ways of communicating.

FINRA trade and communications surveillance challenge 3:
Determining actual wrongdoing

A firm’s ability to distinguish between clear signals of wrongdoing and simply ‘noise’ within the trading environment makes it even more challenging for firms to comply with FINRA market manipulation rules. Many trade surveillance systems find it difficult to distinguish between false results (or "false positives") and instances that actually warrant an investigation. Additionally, there needs to be evidence of intent, which further complicates matters for firms.

FINRA trade and communications surveillance challenge 4:
Disparate systems

Surveillance doesn't have to be done holistically. In fact, many firms today still use different systems for different types of data or even asset classes. For example, many firms carry out their communications and trade surveillance separately, through different platforms. However, trades don’t happen in isolation and this data is deeply interconnected. Disparate data not only impacts the time it takes for firms to respond to potential instances of misconduct or market manipulation but it also prevents them from getting a holistic view of their trading operations.

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