FINRA is a not-for-profit, self-regulatory organization (SRO) dedicated to promoting investor protection and market integrity in a manner that facilitates vibrant capital markets. One of FINRA’s tools for achieving this objective is fair and effective enforcement of our member firms’ compliance with securities laws and regulations.
FINRA’s highest priority when it identifies misconduct is to seek restitution for harmed investors. However, like many other self-regulatory organizations in the securities industry, FINRA also imposes fines on its member firms to discourage further misconduct. For FINRA, fine amounts are based on public, pre-established sanction guidelines and the facts and circumstances of the individual case. FINRA does not target any minimum amount of fines to be issued. FINRA’s operating budget does not include fines, and fine monies are not considered in determining employee compensation and benefits.
FINRA’s use of fine monies is governed by FINRA’s Financial Guiding Principles (Principles), which we publish to provide more transparency about how we manage our financial resources to ensure we fulfill our regulatory responsibilities and further our mission. FINRA’s Board reaffirmed the Principles in December 2019. As the Principles describe, FINRA accounts for fine monies separately, and any use of such monies is approved, separately from other expenditures, by the Board or its Finance, Operations and Technology Committee (Finance Committee). The Board or the Finance Committee may authorize the use of fine monies only for one of four enumerated purposes:
- capital initiatives or nonrecurring strategic expenditures that promote more effective and efficient regulatory oversight by FINRA (including leveraging technology and data in a secure manner) or that enable improved compliance by member firms;
- activities to educate investors, promote compliance by member firms through education, compliance resources or similar projects, or ensure our employees are highly trained in the markets, products and businesses we regulate;
- capital initiatives required by new legal, regulatory or audit requirements; or
- replenishing reserves in years where such reserves drop below levels reasonably appropriate to preserve FINRA’s long-term ability to fund its regulatory obligations.
Under the Principles, FINRA also makes public a description of the use of fine monies approved by the Board or its Finance Committee during the prior year. This report describes the Board-approved initiatives that were supported by 2019 fine monies.
FINRA issued $39.5 million in fines in 2019, and the FINRA Board has determined that there were $71.1 million in fines-eligible expenditures in 2019 (i.e., capital initiatives, strategic expenditures and other activities eligible to be funded by fine monies based on the criteria set forth above). Because the total of fines-eligible expenditures exceeded the amount of fines issued in 2019, the balance of $31.6 million was funded from FINRA’s reserves.
Fines-eligible expenditures funded by 2019 fines issued
Fines-eligible expenditures funded by reserves
Total 2019 fines-eligible expenditures funded by fines and reserves
The 2019 fines-eligible expenditures fall under two broad categories that align with the purposes set forth in the Principles:
Initiatives supported by fines and reserves
Capital initiatives or nonrecurring strategic expenditures that promote more effective and efficient regulatory oversight by FINRA (including leveraging technology and data in a secure manner) or that enable improved compliance by member firms, and capital initiatives required by new legal, regulatory or audit requirements.
Activities to educate investors, promote compliance by member firms through education, compliance resources or similar projects, or ensure our employees are highly trained in the markets, products and businesses we regulate.
The fines-eligible expenditures within these categories, which are described in more detail below, furthered FINRA’s goals to implement efficient oversight programs that protect investors and the markets; modernize critical securities industry infrastructure; strengthen our ability to track trading across markets; enhance our examination, investigation and disciplinary programs; enhance the efficiency of FINRA systems; facilitate compliance by member firms and equip investors with knowledge and resources to help them navigate ever-evolving markets, products and services. Some of these projects are ongoing, multi-year initiatives that have extended into 2020 and, in some cases, will continue into future years.
Capital Initiatives and Strategic Expenditures
Modernizing Securities Industry Infrastructure Administered by FINRA
FINRA administers a number of technology systems that support the regulation of brokers and their firms by FINRA, as well as by the U.S. Securities and Exchange Commission (SEC), state regulators and other SROs. FINRA continues to enhance its systems to adapt to the changing brokerage industry, and, in 2019, allocated $18.7 million to initiatives to modernize several systems we administer.
- Enterprise Cloud Migration—Since 2013, FINRA has migrated various technology applications from existing FINRA-managed data centers to cloud-based platforms to increase the effectiveness and efficiency of our programs, reduce the long-term costs of maintaining our own data centers, and improve our ability to add data processing and storage capacity as needed. In 2019, FINRA invested $10.5 million to migrate the remaining major regulatory applications to cloud-based platforms.
- Registration, Testing and Continuing Education Systems—In 2019, FINRA invested $8.2 million to transform and enhance its registration, testing and continuing education systems. This investment includes spending related to the multi-phased initiative launched in 2018 to transform its registration and disclosure programs, including the Central Registration Depository (CRD) system, the central licensing and registration system for the U.S. securities industry and its regulators. The transformation, which is expected to be complete in 2021, is intended to increase the utility and efficiency of the registration and disclosure process for firms, investors and regulators, and to reduce compliance costs for firms. The investment also supports enhancements to systems that facilitate exam qualification testing and test enrollment, development of a database of candidates who have passed the introductory-level Securities Industry Essentials Exam, and enhancements to Dispute Resolution systems and corporate websites.
Strengthening Regulators’ Ability to Track Trading Across Markets
Combining data from FINRA market systems and its exchange clients, FINRA has developed a comprehensive regulatory audit trail as an essential part of our work to monitor the integrity of the markets. With the foundation provided by our regulatory audit trail, in 2019 FINRA conducted cross-market surveillance for all trading in U.S.-listed equities markets and 50 percent of all trading in U.S.-listed options. FINRA is also responsible for the surveillance of the unlisted equity market and fixed income instruments that trade in the over-the-counter market, and conducts examinations and investigations to identify potential market manipulation or other misconduct. In 2019, we allocated $17 million to a range of initiatives to strengthen the ability of FINRA and other regulators to monitor equity, option and fixed income market activity.
- Market Surveillance Patterns and Reviews—FINRA invested $10.2 million to enhance the sophisticated programs or “patterns” that we use to detect a wide variety of compliance issues and suspicious conduct across markets, and to enhance our reviews of the results of those patterns. In 2019, we enhanced existing equity patterns to improve our surveillance of the markets and to address new and updated rules. In addition, we continued to expand our use of “machine learning” techniques and related visualization tools to conduct market surveillance. We also enhanced existing fixed income patterns to respond to new and updated Municipal Securities Rulemaking Board rules and data changes. And we migrated fixed income patterns to FINRA’s surveillance alert management system.
- Case Management—FINRA invested $4.3 million to continue to implement a new platform to track regulatory matters. The roll out of the new platform to FINRA’s Market Regulation department was completed in 2019 and other departments within FINRA are scheduled to migrate to the platform over time. Among other things, the new platform is able to track a surveillance alert from its inception to its ultimate disposition, thereby improving FINRA's ability to conduct repeatable and accurate yield tracking of the surveillance program.
- Reporting to/Use of Consolidated Audit Trail Data—FINRA is required to report certain data to the Consolidated Audit Trail (CAT), the SEC-mandated central repository of trades, quotes and orders for all U.S. exchange-listed and over-the-counter equity securities and U.S. exchange-listed options contracts across all U.S. markets and trading venues. In 2019, FINRA spent $1.3 million to analyze and develop initial requirements to use CAT data in its surveillance program. (These investments and others described herein do not include expenses related to FINRA’s role as a participant in CAT LLC or FINRA CAT, LLC’s role as the plan processor for the CAT.)
- Trade Transparency Systems—FINRA invested $1.2 million as part of a multi-year initiative to make improvements to its Multi-Product-Platform (MPP), which facilitates the collection and dissemination of trade reports and quotation data across markets that FINRA supervises—namely over-the-counter trading of listed equities, unlisted equities, corporate bonds, Treasury securities and a variety of other fixed income instruments. The multi-year initiative, expected to be completed by 2022, will upgrade the MPP to better handle current market requirements at reduced costs. FINRA’s investment in this area also supported upgrades to the Reference Data Management System, which FINRA operates in conjunction with the MPP to manage data.
Enhancing FINRA’s Examination, Investigation and Disciplinary Programs
In 2019, we invested $12.5 million in several initiatives to enhance our framework and technology for examination, investigation and disciplinary programs; better align our resources with the risks and business practices of member firms; and better identify the brokers and firms that may present the greatest risk to investors and the markets.
- Examination and Risk Monitoring Management Platform—FINRA invested $7.6 million to enhance the technology that supports the platform FINRA examiners and risk monitoring analysts use to manage their work efficiently. We implemented key system and data changes needed to support the shift in early 2020 to conducting examinations and risk monitoring according to firm business model. We streamlined the management of documents and communications related to member firm examinations and enhanced the risk assessment methodology and reporting functions that enable us to more readily identify risks. Further enhancements were made to the market surveillance and analysis applications FINRA uses to detect unusual trading patterns.
- Enforcement Tools—FINRA invested $3.2 million to update the tools the Enforcement team uses to manage its work, including developing a new integrated document management system and more robust case management and reporting systems.
- Examination Analytic Tool—FINRA invested $1.7 million to enhance the tool the Examination team uses to more seamlessly ingest firm blotter data, fine-tune existing risk analytics, surface several new risks and better contextualize the information presented to examiners. These changes improved the consistency and efficiency of the blotter analysis process.
Improving FINRA Filing Systems for Member Firms
In 2019, FINRA invested $8.4 million to improve FINRA’s external-facing digital platform and other firm compliance filing systems. An important part of this investment is FINRA’s Digital Experience Transformation, a multi-year effort to integrate and simplify brokerage firms’ digital interactions with FINRA, facilitating more efficient and effective compliance programs. In 2019, FINRA launched the API Developer Center to support the automation and system integration initiatives of the industry and released a Dynamic Reporting functionality with firm registration and branch data. FINRA also enhanced certain document review systems, including the Advertising Regulation Electronic Files (AREF) System through which firms submit communications with the public, as well as the corporate financing systems through which firms submit documents related to capital-raising activities and arrangements.
Education, Compliance Resources and Training
FINRA provides investors with unbiased information, tools and resources that can equip them to make informed decisions about their assets and the investment professionals with whom they work. In 2019, we invested $3.4 million in various investor education programs.
- Investor Education Programs—In 2019, FINRA created, updated and syndicated digital and print publications, and enhanced existing interactive tools. In addition, FINRA delivered in-person education through outreach efforts ranging from widely attended forums to one-on-one assistance. We also leveraged earned media and no-cost social media channels to drive traffic to educational tools and resources.
- FINRA Investor Education Foundation—Throughout the year, FINRA provided management oversight and program and administrative support (including investing, legal, tax and treasury) to the FINRA Investor Education Foundation to carry out its financial capability-building initiatives.* The Foundation undertook a wide variety of projects in 2019. For example, the Foundation released new research ranging from factors influencing susceptibility to financial frauds to the latest wave of the National Financial Capability Study, which features both state-by-state and investor components. Staff also continued to lead innovative projects to help employers in all sectors of the economy make financial wellness a seamless part of the workday, to build sustainable networks at the community level that strengthen financial capability and to help vulnerable investors avoid fraud.
*Note: The direct program costs of the FINRA Foundation are funded from the assets of the Foundation, rather than from fine monies or reserves.
Helping Firms Comply With Rules
In 2019, FINRA spent $6.7 million to fund operations and support for various tools and resources to help improve compliance by the firms and individuals it regulates. FINRA continued to offer conferences and educational programs, regional member forums, boot camps and outreach events, including the FINRA Annual and Small Firm Conferences, topic-based conferences focusing on Regulation Best Interest, protection of senior investors and regulatory technology.** Other highlights include half-day seminars on anti-money laundering and regional forums offered to member firms free of cost. FINRA also invested in developing additional compliance tools and resources for firms, such as introducing FINRA’s Preferred Pricing Program and enhancing the Compliance Calendar. This cost also includes ongoing call center support for questions from broker-dealers, individual registered representatives and the investing public.
**Note: The program costs include expenses net of funding received from registration fees or other revenues related to conferences and educational programs.
Training FINRA Staff Regarding the Markets, Products and Businesses That FINRA Regulates
FINRA continues to expand the training it provides to staff, including examiners, to ensure staff is prepared for new regulatory challenges. In 2019, we spent $4.4 million on regulatory-focused training, including training programs for Member Supervision, Enforcement and Market Regulation staff.