Common FINRA Violations

Summary of Keypoints

• Supervision and compliance failures are among the most common FINRA violations: Inadequate or outdated written supervisory procedures, inconsistent supervision, poor branch oversight, and lack of documentation frequently lead to enforcement actions, even when misconduct is unintentional.
• Outside business activities and selling away create serious risk: Advisors often fail to properly disclose or obtain written approval for outside activities under FINRA Rule 3270, with selling away violations posing a high risk of suspension or permanent industry bars.
• Communications and record-keeping violations are increasing: Misleading performance statements, unapproved marketing, improper social media use, and failure to retain business communications across digital platforms regularly result in FINRA findings.
• Suitability, Reg BI, and disclosure issues remain enforcement priorities: FINRA frequently cites failures involving unsuitable recommendations, inadequate Reg BI documentation, inaccurate client profiles, and late or incomplete Form U4/U5 disclosures.
• Books and records deficiencies undermine defense efforts: Incomplete client files, missing meeting notes, and use of unapproved communication channels weaken an advisor’s ability to demonstrate compliance during exams, disputes, or arbitration.

Financial advisors operate in a highly regulated environment where compliance failures can lead to significant consequences, including fines, suspensions, or even permanent industry bars. The Financial Industry Regulatory Authority (FINRA) regularly examines firms and representatives, identifying patterns of violations that create risk for investors and the industry. 

Understanding these common violations isn’t just about avoiding penalties—it’s about protecting your career, reputation, and clients. This guide explores the most frequent FINRA violations and provides practical guidance for maintaining compliance in your practice.

Supervision and Compliance Failures

Supervision deficiencies consistently rank among FINRA’s most frequently cited violations. These failures occur at both firm and individual levels, with far-reaching consequences for advisors.

Inadequate written supervisory procedures (WSPs) represent a foundation for compliance problems. Many firms maintain outdated procedures that fail to address current business activities or regulatory requirements. For advisors, working under inadequate WSPs creates compliance vulnerability even when following firm guidance. Review your firm’s procedures critically, especially for newer business lines or products, and raise concerns about gaps with compliance departments.

Implementation failures occur when reasonable procedures exist on paper but aren’t followed in practice. FINRA frequently cites situations where branch offices operate without required oversight or where supervisory reviews occur inconsistently. As an advisor, document your compliance with supervision requirements through detailed notes, saved reviews, and confirmation of supervisory approvals.

Branch office supervision presents particular challenges, especially in remote locations. Technology enables firms to conduct remote supervision, but physical presence requirements remain for many supervisory activities. Advisors in satellite offices should maintain comprehensive documentation of all client interactions and business activities to facilitate effective supervision.

Documentation deficiencies compound supervision problems, making it difficult to demonstrate compliance even when appropriate procedures were followed. The simple regulatory principle “if it isn’t documented, it didn’t happen” guides many FINRA examinations. Maintain thorough, contemporaneous notes of client meetings, suitability determinations, and compliance activities to protect yourself during regulatory reviews.

Outside Business Activities (OBA) Violations

Outside business activity violations consistently appear in FINRA enforcement actions, often stemming from misunderstandings about disclosure requirements. Under FINRA Rule 3270, registered representatives must disclose all business activities conducted outside their member firm—whether compensated or not.

Common misunderstandings about what constitutes an OBA lead to disclosure failures. Activities like serving on boards of directors, managing rental properties, operating side businesses, and certain volunteer roles may require disclosure. The key question isn’t whether you’re compensated, but whether the activity takes time and attention away from your broker-dealer business. When in doubt, disclose the activity to your firm.

“Selling away” violations—private securities transactions conducted without firm knowledge or approval—represent a particularly serious category of OBA violations. These occur when advisors sell investments not offered through their firms without proper disclosure and approval. Such activities can result in automatic statutory disqualification and permanent industry bars. Never discuss investment opportunities with clients unless explicitly approved by your firm.

Documentation and approval procedures for OBAs must be followed precisely. Verbal approvals or informal arrangements aren’t sufficient—written authorization must be secured before engaging in outside activities. Maintain copies of all OBA disclosures and approvals in your personal records, even when firm systems track this information.

Communications with the Public

Communications with the public generate significant compliance risks, especially as digital channels proliferate. FINRA regularly cites advisors for communications that contain misleading statements, inappropriate performance projections, or inadequate disclosures.

Social media compliance issues arise when advisors use personal accounts for business purposes or fail to capture business-related communications. All business communications must be retained regardless of platform. Many advisors mistakenly believe personal social media accounts fall outside supervision requirements, but any business-related content brings these accounts within FINRA’s purview. Use only firm-approved platforms for business communications, and ensure all accounts used for business purposes are disclosed to compliance.

Misleading performance claims represent a perennial source of violations. Statements about investment performance must be fair, balanced, and not misleading. Selective highlighting of favorable performance periods, inappropriate benchmarking, or inadequate risk disclosures frequently trigger violations. All performance discussions should include appropriate time periods, clearly disclose material limitations, and provide balanced presentations of both risks and potential rewards.

Review and approval requirements apply to virtually all client communications. Many violations occur when advisors distribute communications without required approvals or use non-approved templates. Understand your firm’s specific approval processes for different communication types, and maintain documentation of all approvals received.

Record-keeping obligations extend to all business communications regardless of channel. Text messages, social media direct messages, and third-party messaging apps create particular compliance challenges. Many advisors face severe consequences for using non-approved communication channels that circumvent supervision and record-keeping systems. Restrict all business communications to channels your firm can properly archive and supervise.

Suitability and Reg BI Violations

Investment recommendations must comply with suitability requirements under FINRA Rule 2111 and, for retail customers, the enhanced standards of Regulation Best Interest (Reg BI). These standards represent core investor protection measures frequently cited in enforcement actions.

Traditional suitability requirements demand reasonable-basis suitability (understanding the product), customer-specific suitability (appropriateness for the specific client), and quantitative suitability (appropriate amount/frequency of transactions). Reg BI enhances these obligations by requiring broker-dealers and their associated persons to act in the retail customer’s best interest, without placing their own financial interests ahead of the customer’s.

Documentation of customer profile information represents a critical compliance foundation. Failure to maintain current, accurate client information frequently contributes to suitability violations. Regular client profile updates, documented conversations about changes in financial situation or investment objectives, and clear notes about how recommendations align with these factors provide essential compliance protection.

Product-specific suitability concerns arise with complex products requiring specialized knowledge. Alternative investments, structured products, leveraged ETFs, and private placements receive heightened regulatory scrutiny. Before recommending these products, ensure you thoroughly understand their features, risks, costs, and potential conflicts of interest. Document your product due diligence and specific reasoning for each recommendation.

Recommendation documentation failures often occur even when suitable recommendations were made. Without contemporaneous documentation connecting the recommendation to the client’s specific situation, advisors face difficulty defending against suitability challenges. For each significant recommendation, document the specific factors that make it appropriate for that particular client, addressing both the product’s features and the client’s individual circumstances.

Form U4/U5 Disclosure Violations

Form U4 and U5 disclosure issues generate significant enforcement actions, with potentially career-damaging consequences. These forms establish your professional record within the industry, requiring timely, accurate reporting of material information.

Reporting requirements and deadlines mandate updating Form U4 within 30 days of material changes, with certain disclosures (including customer complaints meeting specified thresholds) requiring updates within 10 days. Many violations result from missed deadlines rather than deliberate concealment. Calendar reminders for these deadlines ensure timely compliance with updating obligations.

Common disclosure omissions include customer complaints, financial events, and outside business activities. Customer complaints requiring disclosure include written complaints alleging sales practice violations and damages of $5,000 or more. Financial events including bankruptcies, compromises with creditors, and liens require disclosure regardless of whether they relate to your professional activities. Failure to disclose these events, even when unrelated to securities business, can result in significant penalties.

Financial disclosure requirements extend to events many advisors consider personal matters. Tax liens, bankruptcies, compromises with creditors, and certain civil judgments require disclosure regardless of their connection to your securities business. The perception that personal financial matters remain private leads many advisors to overlook these disclosure requirements, creating significant regulatory vulnerability.

Amendment procedures for correcting historical reporting failures require careful handling. Willful failures to disclose can trigger statutory disqualification, potentially ending your securities career. When discovering historical disclosure failures, consult with specialized counsel before filing amendments to ensure appropriate handling of potential willfulness questions.

Books and Records Violations

Books and records violations may seem technical but create significant compliance risk. FINRA Rule 4511 and SEC Rule 17a-4 establish comprehensive record-keeping requirements that frequently appear in enforcement actions.

Required documentation includes new account forms, suitability information, correspondence with clients, complaint records, advertising materials, and evidence of supervisory reviews. Each category has specific retention requirements and format standards. Understanding these obligations helps advisors maintain adequate records of all business activities.

Common record-keeping deficiencies include incomplete client profile information, inadequate notes of client meetings, and failure to document recommendation rationales. These gaps create significant exposure during both regulatory examinations and customer disputes. Detailed contemporaneous notes of significant client interactions provide essential protection against future challenges to your recommendations.

Electronic communication retention presents particular challenges in today’s digital environment. All business-related electronic communications must be captured and preserved, regardless of the device or platform used. Using unapproved channels for business communications represents a serious violation that can result in significant penalties, including industry bars in extreme cases.

Documentation of customer interactions provides crucial protection when disputes arise. Brief, contemporaneous notes documenting key discussions, recommendation rationales, risk disclosures, and client concerns create valuable evidence of proper conduct. Without this documentation, recollections fade and disputes become difficult to resolve favorably.

Conclusion

Understanding common FINRA violations provides financial advisors with a practical roadmap for compliance. Rather than viewing regulations as obstacles, recognize them as frameworks that protect both investors and your professional reputation. The most effective compliance approach combines thorough knowledge of requirements with practical implementation strategies tailored to your specific business model.

Proactive compliance management significantly reduces regulatory risk. Regular self-assessments, continuing education beyond minimum requirements, and engagement with compliance professionals help identify and address potential issues before they trigger regulatory action. When potential violations are discovered, prompt correction and appropriate self-reporting often mitigate consequences.

Maintaining regulatory compliance requires ongoing attention to evolving expectations. FINRA regularly publishes examination priorities, regulatory notices, and enforcement trends that signal shifting focus areas. Incorporating this guidance into your practice provides protection against emerging compliance risks while demonstrating your commitment to regulatory compliance.

For financial advisors, regulatory compliance represents more than just avoiding penalties—it establishes the foundation for sustainable business practices and client trust. By understanding and addressing these common violation areas, you protect not just your current practice but your long-term career prospects in the financial services industry.

If you need additional assistance understanding FINRA violations, talk to a financial advisor attorney at HLBS Law.