Stock Broker Compliance

Compliance programs at brokerage firms help employees abide by laws and regulations when performing their duties.

A compliance program at a stock brokerage company helps top management ensure that employees abide by laws and regulations as well as industry practices when performing their duties. Department heads also ensure that internal controls and procedures operate effectively and adequately, and that such procedures adhere to human resources policies.

Function

A compliance mechanism helps department supervisors establish adequate and functional internal controls, guidelines and policies that conform to top leadership's recommendations. A control is a set of instructions that a manager puts into place to prevent financial losses because of noncompliance. These losses may result from regulatory fines or litigation. A control is adequate when it details specific procedures that employees must follow to perform tasks and report problems.

Significance

A sound compliance framework is the cornerstone of a corporation's risk management system. It prevents unfavorable regulatory actions that may cause a firm significant financial losses. For example, a good compliance mechanism can help a stock brokerage company prevent Securities and Exchange Commission (SEC) fines because it ensures that employees learn about laws and regulations, and are encouraged to adhere to them. An effective compliance program also helps top management prevent or limit lawsuits from business partners and investors.

Time Frame

Regulatory compliance reviews are permanent practices in a brokerage firm. Various departments perform this review throughout the year to provide top leadership with a clear idea of the company's regulatory standing. For instance, internal auditors may test controls and procedures to ensure they are functional and conform to financial rules. A company's risk management team also may assess compliance controls periodically and review practices in market and credit risk departments. External auditors also can examine a brokerage's operations at the end of the year.

Types

Types of compliance programs vary, depending on the brokerage firm's size, products serviced and industry regulators. A compliance initiative may focus on financial regulations. As an illustration, a small brokerage's finance manager may review financial reporting systems to ensure that they conform to generally accepted accounting principles (GAAP). Alternatively, a compliance procedure may cover ethical qualities by which a stock broker must abide when performing his duties (for example, avoiding conflicts of interest).

Expert Insight

A compliance program at a stock brokerage firm often may cover topics that are unclear or in which no employee has practical expertise. In these cases, a compliance supervisor may hire a specialist to explain a difficult subject. If, for instance, a regulatory affairs manager wants to explain how generally accepted auditing standards (GAAS) may apply to a brokerage's controls and procedures, he may hire a certified public accountant (CPA) to clear up the subject.

References

• U.S. Securities and Exchange Commission: The Laws That Govern the Securities Industry
• AB Training Center: Securites Licensing / Training
• Bureau of Labor Statistics: Securities, Commodities, and Financial Services Sales Agents
• Compliance Online: Banking, Financial services & Accounting Compliance Training
• FINRA: About the Financial Industry Regulatory Authority