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FINRA & OFAC: What Brokerage Firms Need to Know About Compliance this Year (and Beyond)

brokerage firms compliance with FINRA & OFAC

Brokerage firms are subject to numerous compliance obligations. While most brokerage firm executives are generally familiar with the obligation to comply with the rules and regulations promulgated by the U.S. Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA), far fewer have a sufficient understanding of Office of Foreign Assets Control (OFAC) compliance.

FINRA and OFAC compliance overlap in certain respects. As a result, by thoroughly addressing their compliance obligations under FINRA’s rules and the federal securities statutes, brokerage firms will meet some of their OFAC compliance obligations by default. However, there is also much more to OFAC compliance; and, without a targeted and custom-tailored OFAC compliance program, brokerage firms will face the risk of enforcement exposure and substantial liability.

“OFAC compliance is critical for brokerage firms and other entities in the securities industry. As OFAC continues to play a larger role in regulating cross-border financial transactions involving U.S. parties and intermediaries, brokerage firms that fail to adequately address OFAC compliance will place themselves at risk for investigations and enforcement actions.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.

So, what does it take for brokerage firms to adequately address not only their FINRA compliance obligations, but also their OFAC compliance obligations? To begin, we’ll discuss some of the key areas in which FINRA and OFAC compliance overlap. Then, as brokerage firm executives tend to be more familiar with FINRA compliance, we’ll highlight some of the key aspects of OFAC-specific compliance as well.

The Overlap Between FINRA and OFAC Compliance

First, we’ll discuss why FINRA and OFAC compliance overlap in certain respects. This will set the stage for our discussion, and it will help to frame both the similarities and differences between brokerage firms’ compliance obligations in each area.

FINRA’s Rules and the federal securities statutes that FINRA enforces apply to brokerage firms. As a quasi-governmental agency, FINRA works alongside the SEC to regulate the securities industry in the United States, and it is tasked specifically with regulating the conduct of brokerage firms and individual broker-dealers. Within its capacity as a securities regulator, FINRA’s primary focus is on protecting investors; and, to this end, FINRA focuses on enforcing brokerage firms’ and broker-dealers’ obligations in the areas of licensure, recordkeeping, and disclosure.

In contrast to FINRA, OFAC’s primary focus is on protecting national security and promoting the foreign policy interests of the United States. OFAC is tasked with regulating cross-border transactions involving U.S. parties and intermediaries; and, through its sanctions programs, OFAC prohibits many foreign parties (including individuals, companies, and governmental entities) from transacting business through the U.S. financial system. Crucially, when a foreign party or its assets are “blocked,” not only is the party restricted from engaging in financial transactions involving U.S. parties or intermediaries, but U.S. parties and intermediaries have an obligation to avoid doing business with the foreign party as well.

One of the clearest areas of overlap between FINRA and OFAC compliance is anti-money laundering (AML) compliance under the Bank Secrecy Act (BSA). The BSA applies to “financial institutions”—a term that is broadly defined and that includes brokerage firms. Brokerage firms must ensure strict compliance with the BSA; and, in doing so, they must address issues that have the potential to lead to scrutiny from both FINRA and OFAC. For example, some areas of BSA (and AML) compliance that are of concern to both of these regulators include:

Again, these are just examples. FINRA compliance and OFAC compliance both present substantial burdens for brokerage firms; and, even where there is overlap, brokerage firms may still need to address each regulator’s expectations separately. Since FINRA and OFAC have different enforcement mandates and priorities, they have different expectations—and this means that compliance efforts that are sufficient to maintain FINRA compliance may not (and likely will not) be enough to maintain OFAC compliance, and vice versa.

OFAC Compliance: A Key Concern for Brokerage Firms This Year (and Beyond)

As we’ve discussed, while FINRA and OFAC compliance overlap in certain respects, there are also numerous unique aspects to OFAC compliance for brokerage firms. This year (and beyond), simply focusing on FINRA compliance is not enough. As transactions cross international borders with increasing frequency, OFAC compliance continues to take on heightened importance, and OFAC has shown a willingness to hold entities of all sizes accountable through enforcement actions in recent years.

With this in mind, what do brokerage firms need to know about OFAC-specific compliance this year (and beyond)? Some of the key areas of concern in the brokerage industry include:

Here, too, these are just examples. OFAC compliance is complex, and effectively managing OFAC compliance requires an informed, proactive, and custom-tailored approach. While violating OFAC sanctions presents substantial risks for brokerage firms (and potentially their owners and executives), it is possible to effectively manage these risks with a top-down commitment to compliance at all levels of a brokerage firm’s operations.

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