As a California business that operates in the financial services sector, you are well aware that your company and the registered investment advisors (RIAs) are subject to significant government oversight. It’s not uncommon for the Financial Industry Regulatory Authority (FINRA) to initiate broker-dealer audits. FINRA might also impose penalties, including fines, on behalf of the U.S. Securities and Exchange Commission (SEC) for regulatory or ethics violations.
It can be disarming to receive a notice from FINRA notifying you of an impending audit. A description of what that audit entails are detailed below.
Understanding What Triggers a FINRA Audit
The SEC authorizes FINRA, a non-profit regulatory organization, to operate on its behalf. The organization oversees wealth management advisors’ annual filing of an SEC Form X-17 A-5 Part III.
RIAs must complete a yearly report referred to as a Form ADV.
While FINRA doesn’t typically regulate or audit RIAs, there are some exceptions to this rule. There are instances in which financial services companies employ RIAs that serve as broker-dealers. If your company employs individuals in this capacity, then they might be subject to FINRA audits.
What a FINRA audit entails
A FINRA audit primarily focuses on transactional accounting. Auditors seek to uncover answers to the following questions when performing their audits:
- The number of funds that flowed into and out of financial services firms’ or broker-dealers’ hands
- If there’s any evidence of broker-dealer theft
- What the origins and destination of all investment funds were
- Suitability of a broker-dealer’s recommended investment options
A FINRA audit may also involve a more in-depth investigation into how accurately a brokerage advertised its services. Regulators may also request to see evidence that broker-dealer and office staff met any applicable continuing education requirements.
There’s also a chance that FINRA regulators may require broker-dealers to sit for randomly scheduled examinations which the non-profit calls “audits.”
FINRA’s goal in carrying out all of these steps during the audit process is to confirm that a broker-dealer maintains adequate records and complies with all regulatory requirements.
What to expect if auditors uncover FINRA violations
There are a variety of sanctions that regulators may impose if they uncover FINRA violations. These penalties may include:
- Barring from working in the brokerage industry
FINRA maintains a listing of Sanction Guidelines to ensure its members and their affiliates are aware of disciplinary action that they may face if they violate different rules that apply to them.
It can be disarming when your firm or broker-dealers receive notices of impending audits. This is why you must understand what auditors are looking for so that you can ensure all your necessary paperwork is ready. This preparedness may make all the difference as to whether you or your broker-dealers face disciplinary action.