FINRA Places Cybersecurity Front and Center in Its 2024 Regulatory Oversight Report

FINRA’s 2024 regulatory oversight report has emerged providing new guidance and insight regarding the emerging risk landscape, including such topics as financial crime, operational and communications risks, market integrity concerns, and financial custodianship. The report seeks to provide guidance on these themes, providing observations, recommendations, and associated obligations across each topic. The frontrunner for these categories is cybersecurity, which FINRA asserts is critical to success in all other areas of compliance, risk management, and long-term organizational health.

 Cyber security as a key foundation to compliance:

The report begins by outlining a number of concerns related to financial crime and security. Beginning with cybersecurity, the FINRA report reinforces that Multiple SEC andFINRA rules directly address cybersecurity, requiring firms to have policies, procedures, and programs to protect customer information, prevent identity theft, and maintain business continuity in the event of disruptions. FINRA notes key obligations and recommendations to help firms develop a more robust cybersecurity infrastructure. The report states that cybersecurity is a principal concern, contributing to almost every other aspect of regulatory compliance and risk management and carrying a cascading failure potential across almost all other risk considerations. This process goes hand in hand with technology and vendor management, as these tools and services are both key defenses and targets for cyber threats across a number of vectors. Management of vendor services and the health and maintenance of IT resources are key to a strong cybersecurity foundation.  The sections provide insight into key vulnerabilities, such as third-party vendors and inconsistent controls across branch or satellite locations. It goes on to discuss fundamental infrastructure hygiene to promote operational resilience, such as vendor due diligence, control sustainability, and data integrity. The ubiquity of digital transformation puts cybersecurity at the crux of regulatory compliance and risk management.

While cybersecurity takes a front-page role in the report, FINRA goes on to describe numerous themes and trends that will bevitally important for 2024 and beyond. Among these, guidance on new anti-money laundering requirements and the new requirements for the Consolidated AuditTrail stand out as important themes when considered alongside the cybersecurity narrative.

AML procedures in a digital age:

The report outlines several considerations related to AML, particularly when considered in the context of digital transformation and cybersecurity. The report outlines four important principles for a modern AML framework that help stakeholders see the forest through the trees of evolving technologies, third party supply chains, and ongoing digital transformation.

Customer identification is vital, as the participants in any transaction can come obscured through the myriad of layered stakeholders. CIP also supports regulatory compliance by helping to map a transactional supply chain and providing a robust framework to help generate suspicious activity reports for FinCen requirements and can contribute data to other compliance and risk management efforts. The approach also contributes to another FINRA recommendation of ongoing customer due diligence by helping to develop customer risk profiles. Lastly, FINRA stresses the importance of independent testing of the organization’s AML infrastructure, ensuring the yearly requirement is met and these variables are adequately considered.  

Consolidated Audit Trail:

The FINRA report Emphasizes the ConsolidatedAudit Trail (CAT) as an important area of improvement across compliance activities. Member firms are required to report specific events accurately and timely to the CAT central repository, and corrections submitted within defined deadlines. This is a difficult process given the CAT’s requirements, and FINRA describes Incomplete or inaccurate reporting (including events, timestamps, order details), failure to report errors, and inadequate supervision of third-party vendors responsible for reporting as common findings among non-compliance cases. FINRA makes several best practices recommendations including the mapping of internal data to CAT fields to understand the scope of translation, archiving CAT feedback or use in regular comparative reviews, and utilizing CAT reports and resources for supervision and third-party due diligence.

In FINRA's 2024 landscape, cybersecurity has shifted from a siloed concern to the crucial foundation for compliance, risk management, and organizational health. As digital transformation reshapes financial services, prioritizing robust digital defenses, including strong AML procedures and accurate CAT reporting, becomes paramount for navigating evolving regulations and ensuring long-term success.Remember, in the digital age, a secure future is a compliant future.

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