FINRA Audits: What to Expect and How to Prepare

Did you know that FINRA conducts between 1,500 and 2,000 audits a year?

The Financial Industry Regulatory Authority (“FINRA”) delivers audits and regulation services to the financial industry. As a Self-Regulatory Organization (“SRO”), FINRA works closely with the Securities and Exchange Commission and enforces securities regulations. When your firm is due for an exam, FINRA assigns a Regulatory Coordinator who works with an examination team to build a risk-based execution strategy focusing on areas that are material to your business. The team may conduct reviews for compliance with the Municipal Securities Rulemaking Board’s rules, and the rules of other exchanges for which FINRA conducts regulatory work. In the following article, we outline what you can expect and how to prepare yourself and your firm for FINRA examiners.

BACKGROUND

Annually, FINRA assesses your firm’s business activities by evaluating its risks. The results of these evaluations help determine whether your firm will receive an audit or “cycle examination” every one, two, three, or four years.

The investigation begins electronically through FINRA’s Firm Gateway portal. The investigation process includes a pre-site inspection of documents and an on-site inspection conducted by a FINRA team. FINRA initiates the process by sending a notice to your firm through the portal as many as 60 days prior to the on-site component, which details the investigation process, and specifically informs your firm when it should receive FINRA’s first document request. The information FINRA gathers from these documents prior to the on-site component allows FINRA to design an effective evaluation strategy tailored to your firm’s activities. FINRA then executes this evaluation strategy during the on-site examination.

ON SITE EXAM

Upon on-site arrival, FINRA will typically ask for a tour of your office, and request meetings with the business and compliance leaders. As they will have a sense of their examination strategy due to the documents and information they receive prior to arriving on site, FINRA will make more granular requests for documents and meetings according to the strategy and review priorities developed during the pre-site inspection of documents. To ensure the most efficient examination, it is imperative that your firm communicates efficiently and swiftly with the on-site FINRA team. Holding weekly meetings with your firm to discuss progress of the exam and possible corrective action provides one method to ensure a smooth and efficient inspection. If your firm demonstrates immediate corrective action, the activity may not appear in the final Examination Report (see below).

EXIT MEETING

Once on-site reviews are almost complete, the FINRA examination team will conduct an Exit Meeting. This is when FINRA discusses areas for review and preliminary exceptions, and provides your firm with its recommendations. The team will also provide an Exit Meeting Report before holding the Exit Meeting, allowing your firm the opportunity to discuss and develop a response for each potential exception ahead of time. If your firm has documentation or evidence to address exceptions, you can provide it at the Exit Meeting for FINRA to review and assess before the examination is complete and closed.

EXAMINATION REPORT

Following the completion of your firm’s Exit Meeting, FINRA prepares an Examination Report and submits it to your firm’s CEO. If FINRA finds no exceptions, the exam is complete. But, if the team finds exceptions, the firm must provide FINRA with a written response addressing any corrective actions the firm has taken or plans to take. If FINRA finds the response is adequate, your firm will receive a Disposition Letter that outlines the treatment in terms of No Further Action, Cautionary Action, or Referral to Enforcement. If the response is inadequate, FINRA will further discuss the response with your firm.

While FINRA examinations and audits can be stressful, they allow firms the opportunity to review the risks that impact your business. Most exceptions uncovered by FINRA are resolved through an informal disposition and are not reported on Forms U4 or BD. When exceptions are noted, it’s important that your firm updates its Written Supervisory Procedures to address the issues. If concerns arise relating to registered representative activity, the firm should address these in your Continuing Education Needs Analysis and incorporate the findings into your Firm Element Training Plan.

At DWH Legal, our lawyers defend clients in examinations, investigations and enforcement proceedings initiated by the SEC, FINRA, various state securities regulatory agencies and other SROs. We also are retained to perform internal investigations to identify potential issues before the initiation of regulatory inquiries. To learn more about our firm’s Regulatory and Enforcement practice, please click here and contact us at by email at dhyman@dwhlegal.com, or by phone at our Chicago office at 312.380.6587.