The $70 Million Question: Guide to Fintech Compliance & FINRA Rule 3110

Amin Ghadersohi
Aug 28
10 min read

Updated: Oct 9

The Wake-Up Call Every Platform Founder Needs

Picture this: You've built an innovative investment platform. Users are signing up. Trades are flowing. Then FINRA shows up for an exam and discovers you haven't been properly supervising electronic communications. The result? A seven-figure fine, months of remediation, and potentially, the end of your business.

This isn't a hypothetical scenario. In 2023, FINRA issued over $70 million in fines for supervisory failures, with individual penalties reaching $16.5 million. The violations weren't from fly-by-night operations—they included established firms that simply failed to adapt their supervision to modern business realities.

FINRA Rule 3110 (Supervision) is the regulatory framework that governs how broker-dealers must oversee every aspect of their operations. Think of it as the operating system for compliance—without it, everything else falls apart.

At its core, Rule 3110 requires firms to establish and maintain a supervisory system that's "reasonably designed" to achieve compliance with securities laws. But here's what they don't tell you in the rulebook: "reasonably designed" is a moving target that evolves with technology, market practices, and regulatory expectations. What worked five years ago might get you fined today.

The Anatomy of Rule 3110: What You Actually Need to Build

The Three Pillars Every Platform Must Have

Let's cut through the regulatory jargon and focus on what Rule 3110 actually requires you to build. Think of it as a three-legged stool—remove any leg, and your compliance program collapses.

Pillar 1: Written Supervisory Procedures (WSPs)—Your Compliance Playbook

WSPs are essentially your firm's operating manual for compliance. But here's the catch: generic templates won't cut it. Your WSPs must be a living document that reflects how your platform actually operates.

What Your WSPs Must Cover:

Securities transactions: How you monitor every trade, from order entry to settlement.
Customer accounts: Your process for opening, maintaining, and reviewing accounts (including those KYC and suitability checks you've been putting off).
Money movement: Every pathway funds and securities can take through your platform.
Marketing and communications: Yes, that includes your TikTok marketing strategy and Discord community.
Technology and cybersecurity: How you protect customer data and ensure system integrity.

The Annual Update Trap: Rule 3110 requires annual WSP reviews, but waiting a full year between updates is a recipe for disaster. Smart firms review their WSPs quarterly and update them whenever they launch new features, enter new markets, or face regulatory changes.

Pillar 2: Designated Supervisors—The Buck Stops Here

You can't just name someone a "supervisor" and call it a day. Rule 3110(a)(4) requires you to designate appropriately registered principals who actually understand the business they're supervising.

Reality Check: That brilliant engineer who built your trading engine? They probably can't supervise securities activities without proper FINRA registration (typically Series 24 for supervision). You need qualified people with both the credentials and the practical knowledge to spot problems before they become violations.

Pillar 3: Internal Inspections—Trust, But Verify

Rule 3110(c) mandates a structured inspection program:

Annual inspections for every Office of Supervisory Jurisdiction (OSJ).
Periodic inspections for branch offices (at least every three years, more often for higher-risk locations).
Documentation of findings and corrective actions taken.

Pro Tip: Even if you're a fully digital platform with no physical branches, you still have "locations" that need inspection—think of them as functional areas like customer onboarding, trading operations, and customer service.

The Technology Stack That Keeps You Out of Trouble

Your Digital Surveillance Arsenal

Gone are the days when supervision meant reviewing paper trade tickets. Modern platforms generate millions of data points daily, and Rule 3110(b)(4) expects you to monitor all of it. Here's what you actually need to build or buy:

Communication Surveillance: Big Brother for Compliance

Every email, Slack message, WhatsApp chat, and yes, even those late-night Discord discussions about "diamond hands" need supervision if they relate to your business.

The Minimum Viable Surveillance Stack:

Email archiving with full-text search and retention (minimum 3 years, but smart firms keep 7).
Social media monitoring for your company accounts AND employee posts about your business.
Instant messaging capture for Slack, Teams, WhatsApp Business—whatever your team uses.
Voice recording if you have phone-based trading or customer service.

The Lexicon Library You Need: Your surveillance system needs smart keyword detection. Start with these categories:

Red flags: "guarantee," "can't lose," "insider," "off the books."
Complaints: "fraud," "unauthorized," "churning," "lawyer."
Regulatory: "SEC," "FINRA," "investigation," "subpoena."
Risk indicators: "margin call," "error," "system down," "hack."

Reality Check: Those free email filters aren't going to cut it. You need enterprise-grade surveillance that creates audit trails, generates reports, and can reconstruct communication threads during an exam.

Trade Surveillance: Catching Problems Before They Explode

Your trading surveillance system is like having a compliance officer watching every single trade in real-time. Here's what it needs to catch:

Churning Detection: Algorithms that flag when account turnover exceeds 6x annually (the traditional red line).
Suitability Violations: Alerts when a conservative investor suddenly starts trading weekly options.
Manipulation Patterns:

- Wash sales (buying and selling the same security to create fake volume).

- Marking the close (trades in the last minutes to manipulate closing prices).

- Layering and spoofing (fake orders to move prices).

Best Execution Failures: Comparing your execution quality against market benchmarks.

The Exception Report Reality: These systems will generate hundreds of alerts daily. The key isn't eliminating false positives—it's having a documented process for reviewing and dispositioning every single one.

Your 90-Day Roadmap to Rule 3110 Compliance

Week 1-2: The Reality Check Phase

Stop everything and figure out where you actually stand. This isn't the time for optimism—it's time for brutal honesty about your compliance gaps.

Your Gap Analysis Checklist:

Map every single way customers can interact with your platform.
List all communication channels (including that Telegram group you forgot about).
Document your current "supervision" (even if it's just Bob checking emails occasionally).
Identify every system that touches customer data or trades.
Count how many people actually have FINRA licenses (spoiler: it's probably not enough).

The Hard Truth: Most platforms discover they're supervising less than 20% of what Rule 3110 requires. That's not a gap—it's a chasm.

Week 3-4: Writing WSPs That Won't Get You Fined

Forget downloading generic templates. Your WSPs need to describe YOUR actual platform, not some theoretical broker-dealer.

The WSP Blueprint That Works:

Account Opening: Document your EXACT process, from first click to funded account.

- How you verify identity (not just "we check ID").

- Your suitability questionnaire and scoring methodology.

- Red flags that trigger enhanced due diligence.

- Who approves accounts and their qualification requirements.

Trade Monitoring: Be specific about your surveillance.

- Alert thresholds (e.g., "trades exceeding 10% of average daily volume").

- Review timelines ("all alerts reviewed within 24 hours").

- Escalation triggers ("pattern of 3+ similar violations").

- Documentation requirements for dispositions.

Communication Oversight: Cover every channel.

- Email review sampling (minimum 10% for most firms).

- Social media monitoring frequency.

- Instant messaging retention periods.

- Voice recording requirements and review procedures.

Week 5-8: Building Your Tech Stack (Without Breaking the Bank)

You don't need to spend millions, but you do need systems that create defensible audit trails.

The Minimum Viable Compliance Stack:

Trade Surveillance: Start with rule-based alerts, add ML later.
Communication Archiving: Cloud-based solutions start at $25/user/month.
Case Management: Track investigations and resolutions.
Document Management: Store WSPs, reports, and evidence.
Training Platform: Prove your team knows the rules.

Budget Reality: Expect to spend 5-10% of revenue on compliance technology. Yes, that's a lot. No, you can't avoid it.

Week 9-12: Testing and Documentation

Before FINRA shows up, stress-test everything.

The Pre-Exam Audit:

Run sample trades that should trigger alerts—do they?
Send test communications with red-flag keywords—are they caught?
Have someone unfamiliar with your procedures try to follow them.
Attempt to reconstruct a day's worth of supervision from your documentation.
Review a month of exception reports—can you prove proper disposition?

Documentation Standards:

Every supervisory action needs a record.
Every exception needs a disposition.
Every decision needs a rationale.
Every system change needs an audit trail.

The Million-Dollar Mistakes You're Probably Making Right Now

The Violations That Keep FINRA Examiners Busy (And Rich)

Let's talk about the expensive mistakes that seemed like good ideas at the time. These are real violations from real firms that thought they had supervision figured out.

Mistake 1: The "Set It and Forget It" Email Review

The Violation: A firm set up keyword alerts in 2019 and never updated them. By 2023, they missed an entire pump-and-dump scheme because criminals had evolved their language.

The Fine: $2.5 million

The Lesson: Your lexicon library needs monthly updates. Criminals read FINRA alerts too—they know what words to avoid.

Mistake 2: The "We'll Review It Later" Exception Report

The Violation: Exception reports piled up for weeks. When FINRA asked for proof of review, the firm had 10,000 unreviewed alerts.

The Fine: $1.8 million

The Lesson: An unreviewed alert is worse than no alert at all. It proves you knew about potential problems and ignored them.

Mistake 3: The "Trust Our Star Trader" Oversight Gap

The Violation: A firm's top producer was "too busy" for supervision. They generated 40% of revenue, so nobody questioned their trades. They were running a Ponzi scheme.

The Fine: $16.5 million (plus criminal charges)

The Lesson: Your biggest producers need MORE supervision, not less. They have the most opportunity for harm.

Mistake 4: The "We Use Slack, Not Email" Loophole

The Violation: A firm monitored email religiously but ignored Slack, Discord, and WhatsApp where actual business was conducted.

The Fine: $750,000

The Lesson: If your team communicates on it, you need to supervise it. Period.

What FINRA Is Looking for in 2024 and Beyond

Based on recent exam priorities and enforcement trends, here's what's on FINRA's radar:

Crypto and Digital Assets: How are you supervising cryptocurrency recommendations and DeFi discussions?
Social Media Influencers: If you're using influencer marketing, how do you supervise their content?
Alternative Data: Using sentiment analysis or satellite imagery? You need to supervise how it's used in recommendations.
Work-From-Home Supervision: Remote work isn't an excuse for weak supervision.
Cybersecurity as Supervision: Data breaches are now considered supervisory failures.

The Playbook That Actually Works: Lessons from Firms That Got It Right

Smart Technology, Not More Technology

The firms with the best compliance records don't necessarily spend the most—they spend smart.

The 80/20 Rule of Compliance Tech:

80% of your violations will come from 20% of your activities.
Focus your best technology on high-risk areas (options trading, penny stocks, margin accounts).
Use simpler systems for low-risk activities (index fund investments, buy-and-hold accounts).

AI and Machine Learning: The Reality Check:

ML reduces false positives by 60-70% after proper training.
Natural Language Processing catches context, not just keywords ("guaranteed" in education content vs. sales pitch).
But AI doesn't replace human judgment—it amplifies it.
Budget 6-12 months for ML systems to learn your platform's patterns.

Building a Compliance Culture That Doesn't Suck

Nobody wakes up excited about compliance training. But the firms that avoid fines have figured out how to make supervision part of daily operations, not a burden.

What Actually Works:

Gamification: Leaderboards for catching issues, not just closing deals.
Transparency: Share sanitized enforcement cases—"This is what a $2M fine looks like."
Integration: Build compliance checks into workflows, not as separate tasks.
Incentives: Bonus structures that reward compliance, not just revenue.
Communication: Anonymous tip lines that actually get checked (and acted upon).

The "Compliance Champion" Model: Instead of one overwhelmed compliance officer, successful firms designate compliance champions in each department. They're not police—they're translators who help teams understand how rules apply to their specific work.

Documentation: Your Get-Out-of-Jail-Free Card

When FINRA shows up, documentation is the difference between a warning letter and a seven-figure fine.

The Documentation Trinity:

What you reviewed: Screenshots, reports, timestamps.
What you decided: "Reviewed 50 trades, flagged 3 for follow-up."
Why you decided it: "Pattern consistent with tax-loss harvesting, not manipulation."

The 48-Hour Rule: Document supervisory actions within 48 hours. Memory fades, but audit trails are forever.

The Bottom Line: Your Supervision Reality Check

Here's the truth most compliance consultants won't tell you: Perfect compliance is impossible. FINRA knows this. They're not looking for perfection—they're looking for genuine effort, continuous improvement, and the ability to detect and correct problems.

But "genuine effort" doesn't mean good intentions. It means:

Systems that actually work.
People who actually review.
Documentation that actually exists.
Responses that actually fix problems.

Your Next 5 Steps (In Order of Importance)

Stop the Bleeding (Week 1):
Identify your highest-risk activities.
Implement basic monitoring immediately.
Start documenting everything, even if imperfectly.
Get Legal Cover (Week 2):
Have securities counsel review your current setup.
Get written opinions on your compliance gaps.
Prioritize fixes based on enforcement risk.
Build Your Tech Stack (Month 1-2):
Start with email archiving and trade surveillance.
Add communication monitoring for all channels.
Implement case management for tracking issues.
Train Your Humans (Month 2-3):
Get your supervisors properly licensed (Series 24 minimum).
Train everyone on red flags and escalation.
Create channel-specific monitoring procedures.
Test and Iterate (Month 3+):
Run mock FINRA exams quarterly.
Update procedures based on findings.
Keep testing until supervision becomes automatic.

The Uncomfortable Truth About Rule 3110

Supervision isn't a feature you can add later. It's not a nice-to-have that you'll implement after your Series B. It's the foundation that determines whether your platform survives its first regulatory contact.

The good news? Getting Rule 3110 right creates a competitive moat. While your competitors scramble to fix supervisory failures during enforcement actions, you'll be building new features and scaling your business.

The bad news? This article just eliminated your excuse for not knowing better. FINRA certainly won't accept it anymore.

Your choice is simple: Invest in supervision now, or pay for violations later. The only difference is that violations cost 10x more and come with public shame.

What's it going to be?

About This Guide

This comprehensive analysis draws from real-world enforcement actions, examination findings, and practical implementation experience across dozens of investment platforms. Whether you're a fintech startup preparing for FINRA membership or an established broker-dealer modernizing your supervisory systems, this guide provides the actionable intelligence you need to build compliant, scalable supervision.

Key Takeaways for Different Readers:

For Founders: Rule 3110 is your highest regulatory risk. Budget 5-10% of revenue for compliance technology and hire qualified supervisors before you need them.

For Compliance Officers: Focus on risk-based supervision. Perfect documentation beats perfect detection. Update your WSPs quarterly, not annually.

For Developers: Every feature you build needs a supervision component. Communication channels, trading functions, and data access all require audit trails and monitoring capabilities.

For Investors: Ask portfolio companies about their Rule 3110 compliance before writing checks. Supervisory failures can destroy enterprise value overnight.

Resources and References

Official FINRA Resources:

Enforcement Actions Database:

FINRA Disciplinary Actions Online

Technology Vendors (Not Endorsements):

Trade Surveillance: NICE Actimize, Nasdaq SMARTS, Trading Technologies.
Communication Surveillance: Smarsh, Global Relay, Proofpoint.
Case Management: ComplySci, Star Compliance, MCO.

Ready to Build Your Supervisory System?

Don't wait for FINRA to find your gaps. Start with a compliance assessment that maps your current operations against Rule 3110 requirements. The cost of getting it right is a fraction of getting it wrong.

Remember: In the world of securities regulation, supervision isn't overhead—it's survival.

Disclaimer: This article provides educational information about FINRA Rule 3110 requirements and should not be construed as legal advice. The examples and enforcement actions cited are based on publicly available information. Specific compliance requirements vary based on your firm's business model, size, and activities. Always consult with qualified securities counsel and compliance professionals when designing and implementing supervisory systems. The fines and penalties mentioned represent historical enforcement actions and may not reflect current or future regulatory sanctions.

Last Updated: August 2025