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Understanding FINRA Compliance Requirements

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The Financial Industry Regulatory Authority (FINRA), is a private, non-profit self-regulatory organization that has the mandate to regulate aspects of the securities industry and the stock market in the United States.

FINRA’s primary areas of jurisdiction extend to monitoring the behavior of stockbrokers and brokerage firms, safeguarding the integrity of financial markets, and averting any possible misconduct or potential fraud. The organization is tasked with overseeing the activities of over 4,000 firms and processes north of 75 billion transactions on an average day. 

FINRA compliance requirements are stringent and firms falling afoul of the FINRA compliance checklist can be subjected to heavy fines. J.P. Morgan, for example, was hit with a $1.1 million penalty for failing to disclose employee misconduct and Citigroup was slapped with a $1.25 million sanction for inadequate employee background checks. 

FINRA also outlines specific cyber security measures securities firms need to implement. A failure to meet these rules and regulations can result in further fines. 

Let’s discuss these in more detail. 

FINRA Compliance Rules & Best Practices for Cybersecurity

FINRA’s guidelines for cybersecurity, published in 2015, were developed from standards outlined by the National Institute of Standards and Technology (NIST). However, the organization notes that “the rapidly evolving nature and pervasiveness of cyberattacks” is a crucial factor and that the guidelines will likely be updated as the threat matrix is further analyzed.

First and foremost among compliance FINRA rules is the establishment of a cybersecurity governance framework. This framework clearly defines an escalation path to deal with cybersecurity threats and outlines the risk management policies, processes and structures that the firm has deployed to effectively quell the menace.

FINRA regulatory compliance urges organizations to develop this framework in consultation with all key internal stakeholders. 

It warns against a siloed approach, outlining that an effective cybersecurity program includes multiple views from business departments such as IT, internal audit, risk management, and more. Each department has a key role to play as only they can effectively determine whether the proposed processes and controls can adequately guard against emerging threats. 

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Cyber Risk Assessments

What is FINRA compliance when it comes to overall cybersecurity risk assessment? The firm talks about the cybersecurity governance framework which we referenced in the previous section but takes it a step further. 

It adds that the framework isn’t a static endeavor i.e. risk assessments must be conducted at periodic intervals to “identify and analyze potential dangers or risks to a firm’s business” particularly those that come about after greater integration with its IT systems.

FINRA regulates that the governance framework should include the following things:

  • The number of corporate assets that have access to a firm’s network assets
  • The vulnerabilities that these assets might face
  • Timeframe for resolving risks as and when they occur

Moreover, FINRA implies that all assets must not be treated equal: those that are of higher priority must be rectified first.  

Technical Controls

Establishing a governance framework and conducting ongoing risk assessments is one thing, but preventive measures designed to stall cyberattacks are also central to FINRA’s cybersecurity recommendations.

The firm calls these ‘technical controls’ and states that they’re designed to safeguard software and hardware that stores and processes data with a view to preserve the integrity of the data itself. 

At a minimum, firms aiming for a FINRA compliance certification should:

  • Implement a defense-in-depth strategy
  • Select controls appropriate to the firm’s technology and threat environment, such as:
  • Identity and access management
  • Data Encryption
  • Penetration testing

Let’s take a closer look at these.

Defense-in-depth strategy

A defense-in-depth strategy utilizes multiple security layers so that hackers have to successfully penetrate several walls before they’re able to reach their intended target. Think of your technical infrastructure as ‘layers’ with preventive security measures at each layer. 

The higher number of security controls mean tougher defense measures in the case of a possible breach, with a greater likelihood of threat mitigation.

Identity and Access Management

A key tenet of FINRA rules is limiting user access to firm systems and data. Employees shouldn’t be given key information that isn’t central to their job or business requirement. 

Furthermore, the proliferation of mobile devices and cloud-based platforms represents another threat: such devices may not be equipped with adequate security controls and could serve as an entry point for hackers. If all employees have access to mission-critical data, then the possible security threats multiply. 

Data Encryption

Encrypting your data ensures that only approved users can access it. That’s because they hold the decryption key, without which the data will remain out of reach. Plus, encryption parameters such as SHA-256 are virtually uncrackable, hence preserving the integrity of your data. 

Using encryption means it’s possible to limit employee access to data on a need-only basis as well as determining when the data was accessed, or which user changed it. 

Penetration Testing

Penetration testing simulates real-world attacks against existing systems and cybersecurity controls. This helps outline security weaknesses and may assist in identifying the weaker links in the chain, the magnitude of business disruptions caused by breaches, and the effectiveness of a response strategy. 

Managed service providers and FINRA compliance consulting companies such as iTeam usually take full responsibility of technical controls since they’re setting up the firewall, working on encryption, directory access capabilities, and more.

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Incident Response Planning

FINRA compliance requirements dictate that firms must also establish policies and procedures to deal with successful intrusions. Incident response planning is critical in order to limit the severity of a breach. Effective plans for incident planning include the following steps:

  • An analysis of areas where the firm is most at risk. Examples include a DDoS attack, network intrusion, or malware infection
  • An assessment of current threat levels including possible attack vectors
  • Containment and mitigation strategy
  • Processes for investigating the incident and damage assessment
  • A communications strategy for outreach to stakeholders such as customers, regulators, and law enforcement bodies
  • Ongoing simulation exercises both internally and in conjunction with other firms in the same industry
  • Specific steps to retain customer confidence such as reimbursement or credit score monitoring


Incident response planning involves several stakeholders. The use of a managed service company assists with things like business continuity planning, the use of specialized security software and tools, intrusion monitoring, and remote monitoring and management.

However, some functions are dealt with internally such as legal and crisis communications. Regulatory organizations will take note of a firm’s incident response planning approach and decide whether it meets minimum standards.

Vendor Management

Third-party vendors represent a significant security risk since they have access to large-scale systems and data but might not protect themselves with the same security protocols as the contracting firm. Hence, an attack on a vendor can become a vector for an attack on a firm’s systems. 

That’s why it’s essential to guard against these risks: according to FINRA, the first step a firm should take is effective due diligence on cybersecurity practices when choosing to work with specific firms. 

This includes discussions on parameters such as data access controls, encryption, virus protection, subcontractor access limits, system patch management, and business recovery practices. 

Firms looking to obtain FINRA cloud compliance also need to take into account contractual terms that discuss the sensitivity of information and systems that their vendors might have access to. The contract should also discuss vendor obligations if the relationship were to end and documentation handover, if applicable.

Since vendor management is another critical part of the threat matrix, it’s necessary to perform due diligence on an ongoing basis and include vendor outsourced systems into the risk governance and assessment processes. Furthermore, whenever a contract with an existing vendor ends, there need to be proper procedures to terminate access to systems and data. 

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Staff Training

It’s commonly perceived that a firm’s employees are the weakest link in cybersecurity management, and the FINRA compliance checklist takes note of this.

Issues arise when employees mistakenly download malware on their work devices or fall prey to a phishing attack. Only rigorous staff training can guard against such malicious attempts to steal data; even highly-secure internal systems can be undermined by employees that aren’t cognizant of best practices. 

According to industry regulatory authority FINRA, some key topics to include in your firm’s cybersecurity training program are:

  • How to properly recognize risks
  • Phishing and social engineering schemes
  • Handling confidential information
  • Tips on password protection
  • Mobile security
  • Software vulnerabilities
  • Emerging technology issues


What’s more, cybersecurity training should evolve as the firm analyzes its loss incidents such as the reasons behind a breach, updates its risk assessment processes, and receives intelligence on new threats. 

Involving a managed provider or FINRA compliance consultants at this stage helps as it can provide advanced security training developed from years of experience managing threats in similar industries and verticals.

Cyber Intelligence & Information Sharing

As cybersecurity threats increase in complexity, FINRA requires that firms share intelligence and information with each other. The organization says this dynamic improves the ability to protect customer data as well as promote the development of information sharing centers. 

FINRA says organizations can opt for different approaches to establish a cyber threat intelligence analysis capability. 

Some firms may choose to rely solely on an in-house department to scan for threats and relay it to others in the industry. Others might wish to outsource this function to a managed security services provider or use software vendors to identify and fix vulnerabilities. 

There’s also the possibility of using a combination of an in-house department and collaboration with managed providers. 

In any network environment, there are usually thousands of events taking place in the background which makes it impossible for a single security expert to manually monitor logs and determine if something is amiss. 

Security information and event management (SEIM) software can play a role here as it constantly scans logs for anomalies and sends an alert if it notices anything untoward.

Advanced security monitoring requires the use of specialized tools and trained security personnel for rapid intervention. Not all firms possess this capability, which is why it’s advantageous for your business to work with a managed services provider for FINRA compliance

Cyber Insurance

The final part of FINRA cybersecurity compliance deals with the possibility of using cyber insurance to offset some of the existing risks. The organization notes that the market for cybersecurity insurance is still relatively new and rapidly evolving. 

As such, it urges firms with existing coverage plans to conduct periodic analysis of the adequacy of their coverage and whether it aligns with the firm’s ability to bear losses. Firms who aren’t currently protected should proactively evaluate the cyber insurance market and determine whether such coverage can enhance its ability to withstand the financial impact of a breach.

Cyber insurance isn’t a mandatory factor for gaining FINRA compliance. The regulatory organization leaves it up to the discretion of each individual firm, but does add that it should be viewed with a lens to mitigate cybersecurity risks and absorb the ramifications of a damaging breach. 

Other Factors

While all the sections above pertain to cybersecurity best practices, there are other factors to take into consideration too.

FINRA worm compliance, for example, pertains to archiving and storing messages such as social media posts, tweets, and other forms of business communication even when done through personal devices. 

Worm compliance for FINRA refers to ‘Write Once Read Many’, or the preservation of messages in a highly-secure format. The organization states:

If electronic storage media is used by a member, broker, or dealer, it shall comply with the following requirements: The electronic storage media must preserve the records exclusively in a non-rewriteable, non-erasable format.”

FINRA email compliance rules also pertain to storing and archiving messages in an easily accessible, tamperproof database. While the precise length of time to store messages may vary, a typical requirement can be anywhere from 3 to 7 years. Again, FINRA consultants can help you achieve both email compliance and FINRA website compliance benchmarks.

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