What Brokerage Firms Need to Know About OFAC and FINRA Compliance
The Financial Industry Regulatory Authority (FINRA) and Office of Foreign Assets Control (OFAC) both play roles—albeit very different roles—in regulating the conduct of brokerage firms in the United States. Brokerage firms must devote adequate attention and resources to both OFAC and FINRA compliance, and they must be prepared to affirmatively demonstrate compliance to both of these regulators when necessary.
This is easier said than done. While there are some areas of overlap between FINRA and OFAC compliance, FINRA and OFAC play different roles in the federal regulatory regime; and, as such, their expectations and priorities differ. As a result, even where brokerage firms’ obligations to FINRA and OFAC seem similar (i.e., know-your-customer compliance and transaction reporting), they are often very different.
While most brokerage firm executives are generally familiar with their firms’ FINRA compliance obligations, the subject of OFAC compliance is much less well-known. But, mistakes with regard to OFAC compliance can be just as costly, as violations of OFAC’s sanctions programs can lead to both substantial civil monetary penalties (CMP) and criminal enforcement. Thus, brokerage firms must give equal consideration to FINRA and OFAC compliance; and, while these areas of compliance may overlap in certain respects, firms must address each area of compliance separately to ensure that they are fully meeting their legal and regulatory obligations.
“FINRA and OFAC compliance are two related, but distinct, areas of concern for brokerage firms of all sizes. Failure to comprehensively address a brokerage firm’s obligations in either area can lead to intensive scrutiny and substantial penalties.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.
Effectively managing FINRA and OFAC compliance requires a detailed understanding of where brokerage firms’ obligations do and don’t overlap. Ultimately, an effective compliance program is one that is both well-structured and comprehensive, and that allows a brokerage firm to efficiently manage (and affirmatively demonstrate) compliance on an ongoing basis.
10 Key Aspects of FINRA and OFAC Compliance in 2023 (and Beyond)
With these overarching considerations in mind, what do brokerage firm executives need to know about FINRA and OFAC compliance in 2023 (and beyond)? Here are 10 key areas that all brokerage firms should carefully address when developing (or reevaluating) their compliance programs:
- Know-Your-Customer (“KYC”) Compliance – Brokerage firms must ensure that they accurately identify their customers for both FINRA and OFAC compliance purposes. The Bank Secrecy Act (BSA) establishes KYC requirements for “financial institutions,” including brokerage firms, and customer identification is a fundamental aspect of OFAC sanctions compliance as well.
- OFAC Sanctions Screening Compliance – If a party is subject to OFAC sanctions, this means that U.S. entities (including brokerage firms) are generally prohibited from engaging with or facilitating transactions on behalf of that party. As a result, beyond conducting customer due diligence for KYC purposes, brokerage firms must conduct thorough OFAC sanctions screening as well.
- Transaction Clearing Compliance – In addition to identifying their customers, brokerage firms must also clear transactions prior to execution. If a proposed transaction involves “blocked” assets or presents a risk for investor fraud, brokerage firms must address these concerns proactively for purposes of both FINRA and OFAC compliance.
- Transaction Blocking and Rejection – If a proposed transaction involves a blocked party or blocked assets, then brokerage firms must generally either block or reject the transaction under OFAC’s regulations. Brokerage firms may need to reject fraudulent transactions for purposes of FINRA compliance as well.
- Transaction Reporting (Including Suspicious Activity Reporting) – Both FINRA and OFAC enforce transaction reporting requirements. While FINRA’s primary (though not exclusive focus) is on suspicious activity reporting under the BSA, OFAC requires brokerage firms to report blocked and rejected transactions promptly.
- FINRA Registration Compliance – Brokerage firms in the United States must register with FINRA, and they must consistently comply with the conditions of FINRA registration. Loss of registration can have devastating effects; and, while this is an extreme remedy, FINRA will not hesitate to suspend or cancel a brokerage firm’s registration if doing so is necessary to protect investors.
- OFAC License Compliance – OFAC license compliance is also essential, but it is very different from FINRA registration compliance. OFAC licenses certain transactions that would otherwise be prohibited under its sanctions programs. Whether relying on a general license or seeking a specific license, brokerage firms must carefully ensure compliance to avoid running afoul of OFAC sanctions.
- General Due Diligence – Due diligence is one of the hallmarks of both FINRA and OFAC compliance. Along with customer and transaction-specific due diligence, brokerage firms must maintain a general focus on due diligence that ensures they are making informed decisions in all aspects of their operations. When it comes to enforcement, ignorance is not an excuse—in fact, being unaware of a risk or compliance obligation can increase brokerage firms’ exposure in many cases.
- Recordkeeping Compliance – Recordkeeping is a hallmark of both FINRA and OFAC compliance as well. FINRA and OFAC each expect brokerage firms to maintain records affirming their compliance efforts, although each regulator’s specific expectations are different. When facing scrutiny from either regulator, being prepared to affirmatively demonstrate compliance can be essential to avoiding unnecessary liability.
- Voluntary Self-Disclosure – Voluntary self-disclosure can also be essential for avoiding unnecessary liability in some cases. As a general rule, FINRA and OFAC both reward brokerage firms for coming forward with information about statutory and regulatory violations when necessary. However, improperly managed self-disclosures can be risky, so it is imperative that brokerage firms take an informed and measured approach to this process.
While these are some of the key areas of FINRA and OFAC compliance, this list is by no means exhaustive. FINRA’s Rules, OFAC’s regulations, the BSA, and the various other federal statutes that govern brokerage firms’ activities impose numerous other requirements as well. When it comes to compliance, comprehensiveness is key, and brokerage firms must work with their counsel to ensure that they are doing everything necessary to effectively manage FINRA and OFAC compliance.
10 Keys to Effectively Managing FINRA and OFAC Compliance
What does effectively managing FINRA and OFAC compliance entail? Here are 10 non-exclusive keys to avoiding unnecessary scrutiny from FINRA and OFAC:
1. Developing Custom-Tailored FINRA Compliance Policies and Procedures
As with all areas of compliance, a custom-tailored approach to FINRA compliance is key. Brokerage firms must develop policies and procedures that specifically—and comprehensively—address their specific risks and needs.
2. Developing Custom-Tailored OFAC Compliance Policies and Procedures
The same is true regarding OFAC compliance. While brokerage firms and other U.S. parties share similar responsibilities when it comes to complying with OFAC’s sanctions, there is no such thing as a “standard” OFAC compliance program.
3. Appointing a Compliance Officer (or Compliance Officers)
Appointment of a compliance officer is essential for both effectively managing compliance and demonstrating a sufficient commitment to compliance to both FINRA and OFAC. Depending on a brokerage firm’s size and the scope of its domestic and international operations, one individual may be able to serve in a comprehensive compliance officer role, or it may be necessary to appoint separate FINRA and OFAC compliance officers.
4. Providing Training to Brokers and Other Firm Personnel
Along with addressing compliance at the officer level, brokerage firms must also ensure that all brokers and other firm personnel receive adequate compliance training. Here, too, customization is key, and individual employees should receive training that is suited to their specific role within the firm.
5. Implementing Sanctions Screening Software and Other Technological Safeguards
OFAC encourages the use of sanctions screening software; and, in today’s world, brokerage firms have little choice but to rely on technological safeguards to help them effectively manage sanctions-related risk and other aspects of compliance. There are a variety of options available, and brokerage firms must ensure that their software vendor contracts include all necessary licenses and protections.
6. Monitoring for FINRA and OFAC Compliance
Managing FINRA and OFAC compliance is not a one-time event. Rather, to ensure that they are continuously doing what is necessary, brokerage firms must actively monitor their operations for compliance on an ongoing basis.
7. Conducting Periodic FINRA and OFAC Compliance Audits
Even with ongoing monitoring, brokerage firms must still conduct periodic FINRA and OFAC compliance audits. These audits will examine a firm’s compliance efforts in greater depth, and they will allow the firm to identify individual compliance failures and prepare voluntary self-disclosures, if necessary.
8. Maintaining Appropriate Financial and Operational Standards
By maintaining appropriate financial and operational standards, brokerage firms can facilitate an effective and efficient approach to FINRA and OFAC compliance management. A well-run (and well-funded) compliance program is easier to manage and will generally be much more effective.
9. Maintaining an Ongoing Top-Down Commitment to FINRA and OFAC Compliance
FINRA and OFAC both encourage brokerage firms (and other entities) to implement a top-down commitment to compliance. Demonstrating a commitment to compliance at the officer level sets the tone for the organization, and helps make clear that brokers and other personnel should err on the side of compliance.
10. Engaging FINRA and OFAC Compliance Counsel
Due to the challenges and complexity of maintaining FINRA and OFAC compliance, brokerage firms should work with experienced compliance counsel on an ongoing basis. Compliance counsel who understands the firm’s business and who has a clear understanding of both FINRA’s and OFAC’s expectations will be able to efficiently assist with comprehensive and custom-tailored compliance management.
Dr. Nick Oberheiden, founder of Oberheiden P.C., focuses his litigation practice on white-collar criminal defense, government investigations, SEC & FCPA enforcement, and commercial litigation.