Compliance

On Finalis and FINRA

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Written by Brad Ziemba

Last edited in Oct 19, 2022

5 min read

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A Relationship Built on Transparency, Honesty, and Integrity

The 2022 Annual Conference of the Financial Industry Regulatory Authority (FINRA), took place in Washington, D.C. last month, on May 16-18. Billed as its “premier event,” FINRA’s Annual Conference “provides the opportunity for practitioners, peers and regulators to exchange ideas on today’s most timely compliance and regulatory topics.”

Finalis was well-represented, and eager to connect with our FINRA colleagues to network and exchange ideas. In addition to myself, Finalis’ CEO Federico Baradello, our COO Alex Sueldo, and Compliance Officer Steven Eng, were in attendance. It was an excellent opportunity to meet key members of FINRA in person, and to strengthen a growing relationship that we’ve nurtured from our beginnings as a fintech startup.

Since Finalis’ launch in early 2020, we have striven to have a direct, open, and transparent relationship with the industry regulator. To be candid, FINRA was initially uncertain—even skeptical or wary—about Finalis’ business model, as we structured ourselves as a “Compliance-as-a-Service” fintech startup, providing our boutique banker clients a 100% cloud-based, tech-enabled regulatory compliance back office. And a sophisticated one at that, with the intent to replace the legacy tech stacks of brokerages, which were largely still stuck in late 20th century technology. From the start, we intended on disrupting this sleepy regulatory compliance corner of the investment banking industry—but doing it the right way, by developing a productive, two-way relationship with FINRA from the get-go.

So over the past year, I’ve met quarterly with our Risk Monitoring Analysts at FINRA, apprising them about Finalis, and how we are doing things in a fresh and even revolutionary way in the securities brokerages sector. To say they have been ‘intrigued’ by the Finalis model is a fair conclusion; the openness with which they’ve embraced it and engaged us in conversation has been positively refreshing.

And this is largely because FINRA itself has turned the corner on technology, and is using cutting-edge 21st century tech to augment its processes, from top to bottom. An illustrative recent example of this was FINRA’s March 2022 decision to approve regulatory proposals enabling brokerages to conduct remote (virtual) inspections of branch offices. A temporary remote inspections regime had been put in place at the start of the pandemic, and this decision was a move to make remote supervision an ongoing option for brokerages. To state the obvious: this development ties in perfectly with Finalis’ business model and strategy, which integrates cloud-based technology with regulatory compliance in the dealmaking landscape.

At the D.C. conference, it was clear to us that FINRA has begun to move the needle from a traditionally risk-based approach to a rules-based one. Underscoring this movement was one of the main plenary sessions on the first day, which featured a conversation between FINRA President and CEO Robert Cook, and SEC Chair Gary Gensler, around topics impacting the markets and the financial services industry. Gensler spent a significant amount of time talking about the regulatory regime and guardrails that are going to be put up by the various regulatory agencies around cryptocurrencies, blockchain, and DeFi (decentralized finance).

The bottom line on crypto, from my perspective: the pendulum is going to swing from nothing to off-the-charts regulation. Gensler’s discussion encompassed no less than six regulatory entities which will be involved—the SEC itself, FINRA, FDIC, the CFTC (Commodity Futures Trading Commission), the NFA (National Futures Association), and every state regulatory board besides. Where Chair Gensler was going with all this is clear: he believes there needs to be a regulatory framework to protect people’s assets in these brand-new cryptocurrency exchanges and platforms.

And it hasn’t taken long for this sea change to start manifesting in the political space: a draft version of U.S. Senator Cynthia Lummis’ (R-WY) comprehensive bill addressing crypto regulation was recently released in early May. The landmark draft covers numerous aspects of crypto regulation in the U.S., including activities that would fall under the jurisdiction of the SEC, CFTC, and other federal regulators. To my mind, the most crucial aspect of the Lummis draft bill adds the term “ancillary asset” to the Securities Exchange Act. Such an asset “may include a digital asset … that is used to facilitate the governance of a distributed ledger technology network or decentralized autonomous organization.”

As far as Finalis is concerned, we’re seeing an increasing number of bankers on our platform engaging in crypto- and blockchain-related deals—and we’re focused and deliberate in our selection of partners and vendors in order to manage this wave and expectation of regulatory extremes in the coming year. Specifically, we’re finding ways of addressing required regulatory items from FINRA in order to determine where our “human-in-the-loop” agency is most efficiently positioned. And Finalis’ baseline of openness and transparency with FINRA has pointed us in the right direction, among other things allowing us to scale—and be efficient in the ways we want to scale.

This relationship has afforded us a positive dynamic with the regulator, one in which they have come to understand Finalis’ Compliance-as-a-Service model much better. Our ongoing dialogue with FINRA over the past year clearly suggests that they want to comprehend our business and, more interestingly, want to be partners along the way. For our part, Finalis is eager to engage and embrace the regulator relationship—to co-design ideas, programs, and even aspects of our workflow on the basis of what the regulator is looking for. In this, our goal is to be seen by the regulator as an important stakeholder and voice as it relates to the digital transformation within regulatory compliance.

In the broader picture, what Finalis is doing in context with FINRA is somewhat unusual. Not many broker dealers set out having an open and engaged relationship or dialogue with the regulator; in fact, they would prefer to avoid the conversation altogether. Such avoidance is not the way to engender trust. Finalis has worked on solving for regulatory compliance transparency and efficiency—hand in glove with the regulator. In this space, integrity is the coin of the realm.

At Finalis, we fully intend to be part of the minting process for that currency.

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