WASHINGTON — The Financial Industry Regulatory Authority (FINRA) has taken important actions to protect investors from fraudulent schemes, products and practices, and to bring new levels of transparency to financial markets. By realigning its resources to quickly escalate issues involving fraud and customer harm, FINRA was better positioned to take swift action to ensure the securities industry operated fairly and honestly for investors.
Significant 2011 achievements:
"Our top priority is to protect investors," said Richard Ketchum, FINRA's Chairman and CEO. "We are continually incorporating measures designed to root out products and practices that harm investors, as well as providing information and tools that help investors save and invest for their future and avoid costly mistakes. We remain committed to ensuring that those who engage in fraudulent or other activities posing a threat to investors are held accountable."
Real-time surveillance techniques enabled OFDMI to uncover potential fraud and insider trading. OFDMI partnered closely with the SEC to refer such matters on an expedited basis so the Commission could take quick action to better protect investors. Year-to-date, OFDMI, which includes FINRA's Office of the Whistleblower, has referred 638 matters involving potential fraudulent conduct to the SEC and other federal or state law enforcement agencies for further investigation, including 290 fraud referrals from the Fraud Surveillance Section and 286 insider trading referrals from the Insider Trading Surveillance Section to the SEC.
OFDMI expeditiously brought to light numerous high-profile cases in 2011 through referrals primarily to the SEC and federal and state law enforcement agencies.
Given the growing complexity of the structured products market, FINRA also brought notable enforcement actions against firms for improper product promotion and/or the unsuitable sale of structured products to retail investors. Sales practice violations included combinations of misrepresentation, material omissions, unsuitable recommendations, and inadequate supervision and training in principal-protected notes, reverse convertibles and subprime investments.
The following descriptions of disciplinary actions reflect the broad scope of 2011 activity.
FINRA has also enhanced its securities firm examination program to help better detect potential fraud and to focus on areas of risk. Regulatory matters posing the greatest risk to investors are designated as "urgent" – and expedited for review to ensure that the appropriate level of resources and expertise are assigned to them, as well as to facilitate coordination and information sharing across departments. FINRA also has increased the number of staff in district offices who are tasked with having an in-depth and ongoing understanding of specific firms, including increased real-time monitoring of business and financial changes. This expansion has enhanced FINRA's ability to evaluate available regulatory information and to target examinations based on that information. FINRA conducted more than 3,050 examinations in 2011.
FINRA exam staff also placed greater focus on branch-level activity – increased the number of branch exams, and refocused our exams at point-of-sale, spending more time on site at the branch offices and, depending on the firm, less time at the main office. There were approximately 350 more branch office exams conducted this year compared to 2010, bringing the total branch office exams to nearly 800.
In the area of market regulation, FINRA dramatically expanded its equity market regulation program. As a result of the NYSE's historic decision to allocate FINRA primary surveillance responsibility for each of its equity and options markets, FINRA aggregated data across all FINRA, NYSE and NASDAQ equity markets, which account for 80 percent of equity volume. As a next step, FINRA is developing comprehensive cross-market surveillance patterns that are scheduled to be launched in 2012 that will examine trading activity across all markets at one time, rather than having multiple patterns survey each market separately. This consolidation of market data for integration into new cross-market surveillance patterns will help FINRA identify problematic trading activity more quickly. Having access to uniform, consolidated data means FINRA will be better equipped to detect improper conduct and stop it before it spreads. To provide for a uniform order audit trail system to serve as a foundation for cross-market surveillance, in November 2011, FINRA completed the expansion of OATS to all NMS securities, which also enabled the NYSE to retire its Order Tracking System. FINRA provides regulatory services to 10 exchanges covering 14 equity and options markets.
In another important 2011 achievement, FINRA implemented a rule in its arbitration forum allowing investors to choose all-public panels in all customer cases with three arbitrators. Providing this option was an important step to enhance confidence in FINRA's arbitration process. In 2011, the most common issues in cases filed in FINRA's arbitration forum were breach of fiduciary duty, negligence and misrepresentation. To date, approximately 4,378 cases were filed in arbitration and 640 cases commenced in mediation.
In 2011, FINRA and the FINRA Investor Education Foundation deployed its resources to educate investors about potential harmful activity. FINRA issued 10 investor alerts focusing on such diverse topics as gold stock scams, non-traded REITS and structured products. The FINRA Foundation, in partnership with Stanford University, launched the nation's first Research Center on the Prevention of Financial Fraud, an interdisciplinary resource for law enforcement, government and research groups studying financial fraud.
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FINRA, the Financial Industry Regulatory Authority, is the largest non-governmental regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing and enforcing rules and the federal securities laws, informing and educating the investing public, providing trade reporting and other industry utilities, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our website at www.finra.org.