Tackling the “Low Hanging Fruit” in Achieving FINRA Compliance

Sylvia Scott, Attorney pic
Sylvia Scott, Attorney
Image: ffslaw.com

Sylvia Scott is an attorney with the Los Angeles-based corporate law firm Freeman, Freeman and Smiley, LLP, and leads the Securities Practice Group. Attorney Sylvia Scott emphasizes the importance of businesses large and small taking a proactive role in evaluating their internal compliance functions, in ways that correspond with FINRA risk-based criterion for cycle exams.

Assessments can be complex and time consuming, with their true value only emerging when FINRA exams occur. That said, there are a number of “low hanging fruit” targets on which examiners will focus. This reflects a tendency on the part of FINRA investigators to focus on rule violations that are simple to identify and easy to prove.

Easily remediable violations include creating comprehensive and up-to-date written supervisory procedures. This involves the formalizing of practices that may already exist informally, particularly among small companies. Another aspect of this centers on Form U4s, which fully disclose recent activities such as creditor settlements and bankruptcies. It pays to carefully review U4 update requirements, as some aspects of reporting are counterintuitive. Finally, new account forms and applications should be properly filled out and update, as failure to do so is considered a significant regulatory breach.

The Culture of Compliance and FINRA

Financial Industry Regulatory Authority pic
Financial Industry Regulatory Authority
Image: finra.org

Sylvia Scott is an attorney and partner at the Los Angeles law firm Freeman, Freeman & Smiley, LLP. Named a Super Lawyer in multiple years, Sylvia Scott has also authored articles for legal journals on topics related to compliance with FINRA regulations in conjunction with her role as an attorney.

Each year, FINRA releases its Annual Regulatory and Examination Priorities Letter in order to disseminate information among businesses about important issues as they relate to compliance with FINRA’s regulatory programs. In 2016, one of the main emphases of FINRA’s letter was a stringent focus on firm culture. FINRA asserted that it would put focus on determining if examined firms supported a “culture of compliance.”

In order to facilitate a culture of compliance, businesses are expected to exhibit a commitment to five core facets of operations. These operations encompass such issues as whether or not employees abide by control functions, whether leaders tolerate the violation of control breaches, and how much effort a company puts into seeking out instances of risk and compliance. Additionally, employees in positions of power must display a strong commitment to a compliant firm culture for the benefit of their teams. Sub-cultures within the corporate structure must also be monitored to make sure that operations fall under direct conformity with the company’s overall commitment to compliance.

FINRA’s Regulatory and Examinations Priorities Letter

Now with nearly three decades of legal experience, Sylvia M. Scott joined Freeman, Freeman & Smiley, LLP, in 2005. As a partner, Sylvia M. Scott leads the firm’s Securities Practice Group, working with brokers and investment advisors in regulatory enforcement matters.

Among the items disbursed by the Financial Industry Regulatory Authority (FINRA) each year is a regulatory and examinations priorities letter. Also referred to as the exam priorities letter, this document outlines the areas upon which FINRA focuses its sweep and cycle examinations. Management must review the letter, whose items should be used to shape risk management procedures. For a larger firm, department heads should also receive a copy of the letter to ensure they meet compliance stipulations within their own respective areas.

Examples of issues addressed in an exam priorities letter include maintaining proper procedures for handling business in complex instruments and private placements. Additionally, the letter may highlight the necessity for eliminating promissory language in procedures that cannot be guaranteed by a firm due to the nature of a volatile investment market.