Guide to Complying
A Guide to Complying with FINRA Regulations for Fintech Startups
The financial technology (fintech) industry has seen explosive growth in recent years. It is important to note that here, the term is focused on financial services rather than technology that supports financial businesses. With that understanding in mind, it is easy to see how much fintech is revolutionizing how we manage, invest, and transact with money. However, with innovation comes responsibility, and fintech startups must navigate a complex regulatory landscape to ensure compliance with organizations like the Financial Industry Regulatory Authority (FINRA). We'll provide a concise guide to help fintech startups understand and comply with FINRA regulations.
Understanding FINRA
FINRA is a self-regulatory organization that oversees broker-dealers and securities firms in the United States. While fintech startups may not always fit the traditional mold of a financial institution, they often intersect with regulated activities, such as securities trading and investment advisory services, to name a few. Here's how to stay on the right side of FINRA's regulations:
1. Determine Applicability:
Naturally, the first step is to determine whether your fintech startup falls under FINRA's jurisdiction. Typically, if your business involves securities trading, digital assets, raises funds or acts as a broker-dealer, you are likely subject to FINRA regulations. These activities fall into the categories of broker-dealers, capital acquisition brokers, and funding portals. A broker-dealer engages in buying and selling securities either for its customers, for its own account, or both. A capital acquisition broker is a broker-dealer that operates under a more limited set of regulations. A Funding Portal acts as an intermediary for crowdfunding, which is a method of raising capital through the collective effort of a large number of sources.
2. Register Appropriately:
If your fintech startup facilitates services that are determined to be applicable, you will need to register which category applies and apply accordingly with the Securities and Exchange Commission (SEC) and become a FINRA member firm. This process involves filing extensive documentation and subsequently adhering to strict compliance standards.
3. AML and KYC Compliance:
Anti-money laundering (AML) and Know Your Customer (KYC) regulations are critical. Implement robust AML and KYC procedures to prevent illicit activities within your platform. Staff and appropriate persons must be fit for purpose. This may include obtaining various qualifications and maintaining continued education.
4. Data Security:
Data breaches and cybersecurity threats pose significant risks. It is crucial to take a comprehensive approach to safeguard user information and comply with FINRA's cybersecurity guidelines. Start by identifying and assessing cybersecurity threats to understand potential vulnerabilities. Protect your assets from cyber intrusions with robust security measures. Continuously monitor your systems to detect any signs of compromise. Have a response plan in place to address breaches swiftly and effectively. Lastly, implement a recovery plan to restore lost, stolen, or unavailable assets promptly.
5. Customer Communication:
Ensure that your communications with customers are clear, transparent, and compliant with FINRA's rules. This includes disclosing fees, risks, and potential conflicts of interest.
6. Record-Keeping:
Maintain comprehensive records of all transactions, communications, and customer interactions. Compliance often hinges on your ability to provide a detailed record trail when necessary.
7. Stay Informed:
FINRA regulations are subject to change. Monitor updates regularly and seek legal counsel or compliance experts to ensure your startup remains compliant. You are responsible for ensuring that you are aware of changes or additional guidance FINRA provides.
8. Seek Legal Guidance:
Navigating FINRA regulations can be complex. Consider consulting with legal experts who specialize in fintech compliance to guide your startup through the process.
Conclusion
Compliance with FINRA regulations is essential for fintech startups operating in the United States. By understanding the applicability of these regulations, registering if necessary, implementing robust compliance measures, and staying informed about changes, your startup can thrive while adhering to the highest standards of regulatory integrity. Complying with FINRA is not just a legal requirement; it's a testament to your commitment to the security and trust of your customers in the ever-evolving fintech landscape.
Your organization deserves the best. Let us be your trusted partner in preparing for these changes. Contact us today to embark on a transformative journey toward a brighter future.
