Four Phases of a Strong Compliance Program: A Practical Guide for Broker-Dealers
In the financial industry, compliance is a critical component of maintaining a strong and trustworthy business. One of the key tenets of a strong compliance program is ensuring that the controls in place are effective in achieving compliance with relevant rules and regulations. This is where FINRA Rule 3120(a)(1), also known as the Supervisory Control System, comes in. The rule requires broker-dealers (BDs) to test and verify that their supervisory procedures are reasonably designed to achieve compliance with applicable securities laws and regulations, as well as with applicable FINRA rules.
While there is a clear regulatory mandate to perform testing of a firm's policies and procedures, there is a lack of guidance on how to perform testing, and few practical tools available for BD compliance testing. This is a significant gap that needs to be addressed.
To help fill this void, we propose the use of a four-phase approach to compliance programs. The four phases are:
Reasonably designed and formalized policies and procedures: This is the foundation of a strong compliance program. Policies and procedures must be designed to meet the firm's unique needs and should be formalized and documented to ensure consistency in implementation.
Implementation: Once policies and procedures have been designed, it is essential to implement them across the organization. This includes ensuring that all employees are trained on the policies and procedures, and that any necessary changes are communicated effectively.
Execution: This phase involves testing the effectiveness of the policies and procedures. BDs must have a process in place to monitor and test their procedures regularly to ensure they are working as intended.
Monitoring: The final phase of the compliance program is monitoring. BDs must regularly review and update their policies and procedures to ensure they remain relevant and effective. This includes monitoring changes in regulations and industry best practices.
The four-phase approach provides a clear framework for BDs to design, implement, execute, and monitor their compliance programs. By following these steps, BDs can ensure that their compliance programs are effective in achieving compliance with applicable laws, regulations, and FINRA rules.
This information is part of the article Broker Dealer Compliance Testing by Janice M. Powell, MBA, IACCP® is Chief Compliance Officer at DFPG Investments and Craig Watanabe is the Director of IA Compliance at DFPG Investments. The full article is intended to be a user’s manual for sixteen accompanying BD testing templates, one of many NSCP Resources.
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