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 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 are published to provide more transparency about how FINRA manages financial resources to ensure FINRA fulfills its regulatory responsibilities and furthers its mission. FINRA’s Board reaffirmed the Principles in September 2021. 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 FINRA employees are highly trained in the markets, products and businesses it regulates;
- 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 2021 fine monies.
In addition to these initiatives, FINRA’s Board approved a multi-year, multi-faceted $30 million initiative to explore innovative ways to reach and educate investors, especially new, self-directed retail investors who conduct transactions through online accounts or via mobile apps. The initiative was funded by fines paid by Robinhood Financial LLC. In 2021, FINRA solicited input from firms, investors and other stakeholders on effective ways to reach these new investors. Although the expenses of this initiative will be incurred over several years, the funding for it was specifically earmarked by the Board from fines collected in 2021, and accordingly the full amount is included in the usage of 2021 fines set forth below.
FINRA issued $90.1 million in fines in 20211, and the FINRA Board has determined that there were $127.7 million in fines-eligible expenditures in 2021 (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 2021, the balance of $37.6 million was funded from FINRA’s reserves and excess operating results.
|Fines-eligible expenditures funded by 2021 fines issued||$90.1 million|
|Fines-eligible expenditures funded by reserves and excess operating results||$37.6 million|
|Total 2021 fines-eligible expenditures funded by fines, reserves and excess operating results||$127.7 million|
The 2021 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.||$80.4 million|
|Activities to educate investors, promote compliance by member firms through education, compliance resources or similar projects, or ensure FINRA’s employees are highly trained in the markets, products and businesses that it regulates.||$47.3 million|
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 the ability to track trading across markets; enhance 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 2022 and, in some cases, will continue into future years.
Capital Initiatives and Nonrecurring Strategic Expenditures
Enhancing FINRA’s Examination, Investigation and Disciplinary Programs
In 2021, FINRA invested $37.6 million in several initiatives to enhance various tools and systems used for examinations, investigations and disciplinary programs. These initiatives are intended to better align 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.
- Enforcement Digital Transformation and Enforcement Tools—In 2021, FINRA invested $11.4 million to modernize and enhance the systems and tools supporting Enforcement investigations and disposition processes. The investment includes spending to enhance matter data, case management and insight systems, as well as replacement of the platform FINRA uses to assist with electronic communications reviews, investigations and legal processes. FINRA also extended Blotter dataset ingestion and analysis tools supporting investigations.
- Advanced Analytics Transformation—FINRA is transforming the advanced analytics program supporting examination, surveillance and enforcement functions to increase coordination, communication and transparency. In 2021, FINRA invested $10.9 million to build a centralized data services and analytics platform that serves as the foundation for numerous applications supporting FINRA’s regulatory programs.
- Examination, Investigation and Disciplinary Program Tools—FINRA invested $9 million to enhance the tools and systems used for examinations, investigations and disciplinary programs. The spending includes enhancements to Bluesheets, SONAR and other systems FINRA uses to conduct insider trading and fraud surveillance. FINRA expanded the Blotter datasets and enhanced the capability to analyze blotter and stock records. Additionally, FINRA transformed the National Cause and Financial Crimes Detection Programs to provide additional support for specialists including those focused on cybersecurity and anti-money laundering programs.
- Examination and Risk Monitoring Management Platform—FINRA invested $6.3 million to enhance the technology that supports the platform FINRA examiners and risk monitoring analysts use to manage their work efficiently. In 2021, FINRA enhanced its systems to improve the coordination between the Exam and Risk Monitoring programs, process and data. In addition, FINRA implemented a new platform for the eFOCUS system firms use to submit their Financial and Operational Combined Uniform Single reports to FINRA and integrated the system with FINRA Gateway as well as implemented necessary changes for Part II, FINRA’s compliance portal.
Strengthening Regulators’ Ability to Track Trading Across Markets
Combining data from FINRA reporting and transparency systems, its exchange regulatory services customers and the Consolidated Audit Trail (CAT), FINRA has developed a comprehensive regulatory audit trail as an essential part of the work to monitor the integrity of the markets. With the foundation provided by FINRA’s regulatory audit trail and newly available CAT data, in 2021 FINRA conducted cross-market surveillance for all trading in U.S.-listed equities and 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 2021, FINRA allocated $22.5 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 2021, FINRA invested $11.8 million in a multi-year initiative to integrate and implement CAT data into 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.)
- Transparency Systems—FINRA invested $6.7 million as part of a multi-year initiative to improve the Multi-Product-Platform (MPP), which facilitates the collection and dissemination of transaction 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 reference data. In addition, FINRA is replacing the system used to report and process corporate actions in unlisted equity securities.
- Market Surveillance Patterns and Reviews and Metrics Reporting—FINRA invested $4 million to enhance the sophisticated programs or “patterns” used to detect a wide variety of compliance issues and suspicious conduct across markets, and to enhance reviews of the results of those patterns. The investment in 2021 included enhancements to improve the surveillance of market activity up to the nanosecond. In addition, FINRA further improved the reporting tools used to monitor market surveillance.
Improving FINRA Filing Systems for Member Firms
In 2021, FINRA invested $13.5 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 launched a series of new systems and tools to help firms manage compliance tasks, submit information and manage how they collaborate with FINRA. In addition, FINRA began to modernize the aging technology platform the Advertising Regulation Department uses and enhanced the Corporate Finance System in response to amendments to FINRA’s private placement and public offering rules.
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 2021, allocated $6.8 million to modernize several systems it administers.
- Registration, Testing and Corporate Systems Enhancements—FINRA invested $5.5 million to transform and enhance its registration, testing and continuing education systems. The investment includes spending related to the multi-phased initiative launched in 2018 to transform 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 was completed in 2021, increases the utility and efficiency of the registration and disclosure process for firms, investors and regulators, and reduces compliance costs for firms. The investment also includes costs to automate accounts governance for several systems, as well as enhancements related to Testing and Dispute Resolution programs.
- Continuing Education (CE) Transformation—FINRA invested $1.3 million on a multi-year initiative to transform the CE program for securities professionals. In 2021, the investment included costs to transform the Regulatory Element to an annual program, and implement the Maintaining Qualifications Program (MQP), which reduces impediments to requalification, and the CE Marketplace program.
Education, Compliance Resources and Training
Special Initiative to Educate Newer Investors
As described above, FINRA’s Board earmarked $30 million of 2021 fines to fund a multi-year initiative to explore innovative ways to reach and educate investors, especially new, self-directed retail investors who conduct transactions through online accounts or via mobile apps.
Helping Firms Comply With Rules
In 2021, FINRA spent $7.5 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 diversity, equity and inclusion in the capital markets, and the innovative technology FINRA uses to protect investors and ensure market integrity. This cost includes the FINRA Institute at Georgetown Certified Regulatory and Compliance Professional (CRCP)® program, which provides compliance, legal and regulatory professionals with an in-depth understanding of the foundation, theory and practical application of securities laws and regulation.
In addition, FINRA offered virtual conference panels on various regulatory topics and business line specific forums to member firms free of cost. FINRA also invested in developing additional compliance tools and resources for firms, including investments to develop a machine-readable rulebook and enhancements to the Report Center. This cost also includes spending for a transformation of the contact center experience for firms, financial professionals, regulators and the investing public. Through the multi-year project, FINRA is implementing new innovative tools, including a virtual assistant and advanced callback features, to improve response time and efficiency.
*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 2021, FINRA spent $5.9 million on regulatory-focused training for staff in FINRA’s Member Supervision, Market Regulation and Enforcement departments.
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 2021, FINRA invested $3.9 million in various investor education programs.
- Investor Education Programs—In 2021, FINRA enhanced BrokerCheck, the Fund Analyzer and other tools and embarked on a large-scale initiative to cull, consolidate and refresh. In addition, FINRA re-imagined its Investor Forum events, including creating new, virtual events for working professionals.
- 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.** In 2021, the FINRA Investor Education Foundation undertook a wide variety of projects, including the launch of its Financial Inclusion Framework, which aims to create new understanding and relationships that address systemic wealth disparities and lead to better outcomes for communities of color and underserved communities. The FINRA Investor Education Foundation also released nearly a dozen new research reports that examined a wide range of topics, including the behaviors, attitudes and knowledge of newer investors, the impact of racial and ethnic disparities among investors and correlations between aging, cognition and susceptibility to fraud.
**Note: The direct program costs of the FINRA Investor Education Foundation are funded from the assets of the FINRA Investor Education Foundation, rather than from fine monies or reserves.
1Note that the 2021 fine amount excludes disgorgement awards of $12.9 million, which are included with fines in FINRA’s Annual Financial Report and contributed to the FINRA Investor Education Foundation once paid to FINRA.