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FINRA Guidance on the Supervision of Independent Contractors

    

Many of the firms that I work with, both large and small, work with representatives that are independent contractors. I am frequently asked how technology can help firms supervise their independent reps, especially in these days of remote work. The past few weeks have seen FINRA impose significant fines and sanctions against a range of firms for supervisory failures. Firms must have processes in place to monitor activities and mitigate this risk.

I recently viewed a virtual panel of FINRA staff and compliance experts that addressed many common challenges found in supervising independent contractors. The presenters covered rules and guidance and shared best practices and suggestions for managing supervision and compliance.

According to Nancy Heffner, an industry panelist from a firm that processes over 1 million transactions per year, it’s not feasible to conduct trade surveillance on the activities of independent contractors manually in a larger organization. Her firm relies on technology to systematically monitor transactions to “get through the weeds of the typical transactions and focus on the higher-risk ones” and capture documentation throughout the process.

Casey Harper from FINRA stated that use of third-party direct feeds are also an excellent tool for monitoring the trades of independent contractors. “Direct feeds can help catch a transaction that might not have gone through the process that it needed to get approved.”

Learn more about capturing employee personal trades

Outside Business Activities are another key concern when it comes to supervising independent contractors. Todd Coppi shared that “as an Examination Director I’ve seen where a lack of adequate controls and supervisory processes as related to OBA can go horribly wrong.”

Casey Harper notes firms that follow the independent contractor model are usually working with reps whose primary focus is generating income and where compliance issues might not be top of mind. In addition, their brokerage activities might not be their primary business. Many independent reps also are CPAs or sell traditional insurance, potentially increasing opportunities for conflicts of interest.

Nancy Heffer explained how technology helps her firm monitor potential conflicts of interest of independent contractors. Their solution gives reps 24/7 ability to change the disclosures that were completed as part of their onboarding process and automatically routes updates to supervisors and compliance. Yearly attestations and annual questionnaires are also completed for all independent contractors.

Learn how MyComplianceOffice helps firms manage Outside Business Activities.

The FINRA team has seen a shift over the last ten years or so to where firms of all sizes are now using technology for transaction supervision and surveillance. Software can help firms efficiently manage and review conflicts of interest and decrease the risk of missing inappropriate activity. The panelists also emphasized the point that for technology to work most effectively, it should be tailored to the specific needs of the firm and their products and reps.

MCO’s Third Party Risk Management solution enables firms to manage due diligence activities associated with third party relationships including vendors, customers, counterparties, agents & partners, including:

  • Third-party approvals
  • Third-party on-boarding activities
  • Initial and ongoing third-party data management
  • Ongoing third-party due diligence

Ready to learn more? Let us know and we’ll set up some time to talk.