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 2020. 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 2020 fine monies.
FINRA issued $57.0 million in fines in 2020, and the FINRA Board has determined that there were $90.2 million in fines-eligible expenditures in 2020 (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 2020, the balance of $33.2 million was funded from FINRA’s reserves and excess operating results.
Fines-eligible expenditures funded by 2020 fines issued
Fines-eligible expenditures funded by reserves and excess operating results
Total 2020 fines-eligible expenditures funded by fines, reserves and excess operating results
The 2020 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; equip investors with knowledge and resources to help them navigate ever-evolving markets, products and services; and expand training to ensure staff is prepared for new regulatory challenges. Some of these projects are ongoing, multi-year initiatives that have extended into 2021 and, in some cases, will continue into future years.
Capital Initiatives and Strategic Expenditures
Strengthening Regulators’ Ability to Track Trading Across Markets
Combining data from FINRA market systems, its exchange clients and the Consolidated Audit Trail (CAT), 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 2020 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 2020, we allocated $31.8 million to a range of initiatives to strengthen the ability of FINRA and other regulators to monitor equity, option and fixed income market activity.
- Use of Consolidated Audit Trail Data—FINRA is required to report certain data to the CAT, the U.S. Securities and Exchange Commission (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 2020, FINRA invested $12 million in a multi-year initiative to implement CAT data in its surveillance and CAT compliance programs. The initiative is expected to be completed in 2022. (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.)
- Market Surveillance Patterns and Reviews—FINRA invested $11.2 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 2020, we enhanced existing 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 enhanced our ability to reconstruct market activity by integrating surveillance and contextual data, and increased our use of automation to improve our surveillance program.
- Transparency Systems—FINRA invested $6.4 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 in 2023, 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.
- Case Management—FINRA invested $2.2 million to complete the migration of its surveillance program to a new platform to track regulatory matters. 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.
Enhancing FINRA’s Examination, Investigation and Disciplinary Programs
In 2020, FINRA invested $18.4 million in several initiatives to enhance various tools and systems we use for examinations, investigations and disciplinary programs. These initiatives are intended to better align our resources with the risks and business practices of member firms; better identify the brokers and firms that may present the greatest risk to investors and the markets; and modernize the systems supporting Enforcement processes.
- Examination, Investigations and Disciplinary Program Tools—FINRA invested $7.5 million to enhance the tools and systems we use for examinations, investigations and disciplinary programs. The spending includes enhancements to Bluesheets and insider trading data, as well as the platform FINRA uses to assist with electronic communications reviews, investigations and legal processes.
- Examination and Risk Monitoring Management Platform—FINRA invested $6.6 million to enhance the technology that supports the platform FINRA examiners and risk monitoring analysts use to manage their work efficiently. In 2021, we plan to launch the new platform for the eFOCUS system firms use to submit their Financial and Operational Combined Uniform Single reports to FINRA. Spending on the two-year project included costs to integrate the system with FINRA Gateway, FINRA’s compliance portal.
- Enforcement Tools—FINRA invested $4.3 million to modernize the tools and systems the Enforcement team uses to manage its work. The investment includes spending related to case management, document evidence and correspondence management, and reporting tools.
Improving FINRA Filing Systems for Member Firms
In 2020, FINRA invested $14.5 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. FINRA implemented artificial intelligence and machine learning techniques within the Advertising Regulation Electronic Files (AREF) System through which firms submit communications with the public. FINRA automated certain functions of the Enterprise Web Security (EWS) platform through which users access FINRA’s web-based applications to improve efficiency and accuracy, as well as enhanced the corporate financing systems through which firms submit documents related to capital-raising activities and arrangements.
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 SEC, state regulators and other SROs. FINRA continues to enhance its systems to adapt to the changing brokerage industry, and, in 2020, allocated $9.1 million to initiatives to modernize several systems we administer.
- Registration, Testing and Corporate Systems Enhancements—FINRA invested $7.6 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 completed 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 includes enhancements to the PROCTOR system through which FINRA administers and delivers computer-based testing and training, as well as enhancements to Dispute Resolution systems and corporate websites.
- Continuing Education (CE) Transformation—In 2020, FINRA invested $1.5 million on the first phase of a multi-year initiative to transform the CE program for securities industry professionals. The enhancements are based on the recommendations of the Securities Industry/Regulatory Council on Continuing Education (CE Council), which comprises securities industry representatives and representatives of self-regulatory organizations and facilitates the development of uniform continuing education requirements for registered persons of broker-dealers.
Education, Compliance Resources and Training
Helping Firms Comply With Rules
In 2020, FINRA spent $8.0 million to fund operations and support for various tools and resources to help improve compliance by the firms and individuals it regulates. FINRA offered virtual conferences and educational programs**, tailored to the unique business needs of operating in a remote-work environment, including a virtual Small Firm Conference, as well as topic-based virtual programs and conferences focused on technology changes at FINRA, and the current and future applications of artificial intelligence by financial regulators and the securities industry. Additionally, FINRA created a virtual conference panel library available on FINRA.org, which allows member firms to hear the most up-to-date compliance information directly from industry and regulatory experts for free at any time. In addition, prior to the start of the pandemic, FINRA offered an in-person Cybersecurity Conference.
Other highlights include virtual bootcamps on various regulatory topics and regional forums offered to member firms free of cost. FINRA also invested in developing additional compliance tools and resources for firms, such as developing a machine-readable rulebook, and launching two new report cards in Report Center. This cost also includes spending to implement a new call center telephone system, as well as 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 2020, we spent $4.9 million on regulatory-focused training for our staff.
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 2020, we invested $3.5 million in various investor education programs.
- Investor Education Programs—In 2020, FINRA created, updated and syndicated digital and print publications, and enhanced existing interactive tools, including the mutual fund analyzer. In addition, FINRA delivered education through virtual outreach efforts, and 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 2020, with many aimed at increasing understanding of the effects of the COVID-19 pandemic on the financial wellbeing of American households. The Foundation released new research on the financial behaviors of seniors, incarcerated women and female investors—all aimed at strengthening financial capability of investors.
*Note: The direct program costs of the FINRA Foundation are funded from the assets of the Foundation, rather than from fine monies or reserves.