How to use FINRA Regulations
How to use FINRA Regulations
Introduction
The Financial Industry Regulatory Authority (FINRA) is a nongovernmental organization writing and enforcing rules on registered financial advisors (e.g. broker-dealers) in the United States of America, thus acting as regulatory body for the securities industry.
The main goal of FINRA is to protect investors from losses caused by fraud and misconduct and thus guaranteeing the safety and fairness of the financial markets.
The two regulatory requirements in scope for CLM are:
- FINRA Rule 2090 (commonly referred to as the “Know Your Customer Rule” or “KYC Rule”)
This rule requires financial advisors, at the opening of the account and throughout the customer lifecycle, to use reasonable diligence to know the customer and to retain the essential facts concerning the customer and the authority of each person acting on their behalf, prior to providing any recommendation.
- FINRA Rule 2111
This rule requires financial advisors to make recommendations on a transaction or investment strategy that are in the best interest of the customer based on the information obtained.
The two aforementioned rules work in tandem, and it could not be otherwise since suitability can only be determined if the financial advisor knows the customer, thus the customer risk profile will limit the investments to those suitable for that customer.
Scope of FINRA regulations supported in CLM
CLM supports with a questionnaire – applicable to both entities and individuals – the following four aspects of the FINRA KYC and suitability rules:Institutional
- Institutional Customer Exemption
The exception from conducting customer-specific suitability assessment for institutional customers. - Customer Investment Profile
The data to be collected for building the investment profile of the customer, which partially varies depending on the type of customer. - Suitability assessments
It covers the three obligations that compose the suitability requirement: reasonable basis, customer-specific, and quantitative. - KYC
It covers the special handling instructions for the account.
The FINRA questionnaire does not cover the FINRA Rule 2090 KYC obligation to “understand the authority of each person acting on behalf of the customer” because this essential fact is collected within the CLM application via the ‘Add related parties’ step and the relevant AML questionnaire in the corresponding Related Party sub-case, plus the collection of the documents relevant for such person.
Triggers
Out-of-the-box, CLM triggers the displaying of the FINRA questionnaire when:
- The product selected is a Security product1.
and - The booking location for the Security product is "United States of America".
and - The answer “Yes” to the field about the security product which is displayed in the ‘Regulatory details’ step within Enrich stage, as a consequence of triggers 1 and 2 being fulfilled.
1 The assumption is that the list of products used by the financial institution contains this flag.
How and where to configure triggers
You can configure the applicability logic for FINRA questionnaire using the ‘ApplicabilityMatrix’ decision table. For information on general configuration of this rule, see the 'Applicability matrix' section of the implementation guide.
The other important decision logic rule is the ‘IsUSFINRAApplicable’ When rule.
Implementations based on CLM 8.5 or earlier will use the ‘ProdRegulationsMasterAppliesWhen’ decision table. This also uses the main decision logic in the ‘IsUSFINRAApplicable’ When rule.
You will need to configure the specific FINRA applicability logic for your financial institution in these above-mentioned rules.