Reported by FINRA

(Summary version featured below)

The 2025 FINRA Annual Regulatory Oversight Report outlines key threats and best practices for preventing financial crime, fraud, and insider trading. Below is a summary with a focus on preventive measures.

1. Strengthening Cybersecurity to Prevent Financial Crime

Cyber-enabled fraud, including ransomware, account takeovers, phishing scams, and imposter websites, has become a major threat. Firms must comply with FINRA Rules 4370, 3110, and 4530 by implementing strong cybersecurity policies.

Best Practices for Prevention:

• Multi-Factor Authentication (MFA): Require MFA for system access, especially for customer and employee logins.

• Threat Intelligence and Monitoring: Regularly monitor for imposter websites, phishing attempts, and unusual account access.

• Data Encryption and Secure Storage: Ensure customer and firm data is encrypted and protected against unauthorized access.

• Regular Cybersecurity Training: Train employees on social engineering tactics and how to identify phishing attempts.

• Incident Response Plan Testing: Conduct simulated cyberattacks (e.g., tabletop exercises) to evaluate response readiness.

2. Strengthening AML and Fraud Detection Mechanisms

Firms are required to establish risk-based AML compliance programs under FINRA Rule 3310 and the Bank Secrecy Act (BSA). Emerging fraud tactics include investment scams, romance scams, and unauthorized account transfers.

Best Practices for Prevention:

• Robust Customer Due Diligence (CDD): Implement enhanced identity verification, including biometric or multi-source verification.

• Automated Transaction Monitoring: Use AI-powered analytics to flag suspicious withdrawals, rapid fund movements, and third-party payments.

• Red Flag Identification & Escalation: Train employees to recognize signs of fraud, such as unusual investment activity, wire transfers to high-risk countries, or account login anomalies.

• Timely Suspicious Activity Reporting (SARs): Ensure rapid escalation and reporting of potentially fraudulent transactions.

• Trusted Contact Verification: Encourage customers to designate a trusted contact person to prevent elder fraud and financial exploitation.

3. Enhancing Insider Trading and Market Abuse Detection

Market manipulation tactics such as spoofing, layering, front-running, wash trades, and marking-the-close remain prevalent, particularly in small-cap IPOs and correlated derivatives trading. Firms must comply with Rules 2010, 2020, 5210, and 5270 to prevent such activities.

Best Practices for Prevention:

• AI-Based Surveillance Tools: Deploy AI-driven pattern recognition models to detect potential insider trading and manipulative trading activity.

• Restricted List and MNPI Controls: Ensure employees handling material nonpublic information (MNPI) have strict access controls and trade monitoring.

• Cross-Product and Cross-Market Surveillance: Monitor for anomalous trading patterns across equities, derivatives, and alternative trading venues.

• Timely Investigations & Reporting: Implement escalation protocols for suspicious trades, with regular audits of surveillance effectiveness.

• Pre-Trade and Post-Trade Analysis: Conduct pre-trade risk assessments for proprietary trading desks and post-trade forensic analysis for manipulative activities.

4. Strengthening Third-Party Risk and Vendor Oversight

As firms increasingly rely on third-party vendors for cybersecurity, trade execution, and compliance monitoring, vendor risk is a major concern.

Best Practices for Prevention:

• Third-Party Vendor Risk Assessments: Conduct regular due diligence on vendors’ cybersecurity and fraud prevention controls.

• Contractual Safeguards: Ensure contracts require vendors to comply with cybersecurity best practices, data protection laws, and FINRA regulations.

• Supply Chain Security Measures: Monitor fourth-party risks (vendors of vendors) that may pose indirect security threats.

• Incident Response Coordination: Require vendors to report breaches immediately and conduct joint cyber drills to test response effectiveness.

5. Addressing Emerging AI-Enabled Financial Crimes

Generative AI (Gen AI) is increasingly used for fraudulent deepfake scams, AI-enhanced phishing, and synthetic identity creation. Threat actors exploit Gen AI for market manipulation, cyberattacks, and social engineering fraud.

Best Practices for Prevention:

• AI Risk Management Framework: Establish strict governance around AI tools used for fraud detection and risk assessment.

• Synthetic Identity Verification Tools: Use behavioral biometrics and AI-based anomaly detection to flag synthetic identities and deepfake-generated credentials.

• Employee & Customer AI Awareness Training: Educate stakeholders about AI-generated phishing attacks and imposter fraud risks.

• AI-Generated Content Monitoring: Monitor social media, dark web activity, and news sources for AI-enabled misinformation campaigns targeting securities.

6. Strengthening Compliance with Regulation S-P & Identity Theft Protections

The SEC’s updated Regulation S-P mandates stronger customer data protection and breach notification protocols. Identity theft risks—including ACH fraud and unauthorized wire transfers—are on the rise.

Best Practices for Prevention:

• Advanced Fraud Detection for ACH & Wire Transfers: Implement real-time transaction scoring and geolocation-based fraud analytics.

• Immediate Customer Notification for Data Breaches: Notify customers within 30 days of unauthorized data access, per Regulation S-P amendments.

• Automated Identity Verification: Require multi-layered identity checks, including facial recognition and dynamic authentication factors.

• Comprehensive Incident Response Plans: Ensure cyber breach response teams have predefined escalation steps for fraud events.

7. Strengthening Internal Controls & Supervision for Financial Crime Prevention

Firms must maintain rigorous compliance programs, regular audits, and proactive risk assessments to mitigate fraud, insider trading, and market abuse.

Best Practices for Prevention:

• Real-Time Employee Trade Monitoring: Require automated trade surveillance for employees, particularly those with access to sensitive information.

• Whistleblower Protections & Ethics Training: Encourage internal reporting of suspicious activities and protect whistleblowers from retaliation.

• Data Loss Prevention (DLP) Systems: Implement DLP tools to monitor for unauthorized data transfers and insider threats.

• Board-Level Oversight of Compliance Risks: Ensure senior leadership is actively involved in fraud risk management and regulatory compliance reviews.

By implementing these best practices, financial firms can proactively detect and prevent financial crimes, insider trading, and market manipulation while ensuring compliance with FINRA, SEC, and AML regulations.