FINRA has been actively monitoring financial technology-related (FinTech) developments in the securities industry. A growing number of FinTech firms have been embracing new technologies, pioneering innovative products and developing client-oriented financial services business models. Many traditional financial service providers are also rethinking their business models, incorporating these technologies and services.
As result of these initiatives, FinTech is transforming various broker-dealers business lines including investment banking, wealth management, trading and research. Broker-dealers are also exploring and leveraging new technologies such as cloud storage, machine learning, and blockchain to enhance their overall operational infrastructure and compliance functions. All of these FinTech-related changes are contributing to an evolving landscape for broker-dealers’ operations.
Over the past few years, FINRA has engaged in an active dialogue with the industry, to assess the impact of various emerging FinTech-related business models and tools on broker-dealer operations as well as on investors. Based on its findings, FINRA develops appropriate responses, including publishing public reports and Investor Alerts.
FINRA has issued reports in two areas of FinTech: Distributed Ledger Technology and Digital Investment Advice. Moreover, FINRA has issued Investor Alerts on virtual currencies, automated investment tools, and crowdfunding. FINRA has also been monitoring areas concerning online capital raising platforms through vehicles such as funding portals and private placement platforms.
In addition to these topics, FINRA is exploring other emerging areas in FinTech that are having a growing impact on the securities industry, including RegTech, artificial intelligence and social media sentiment investing. Each of the these FinTech areas are briefly discussed below, and we are requesting that interested persons please respond to the survey contained on this page regarding the anticipated timeframe for when these areas of FinTech are likely to affect your business.
2022 Report on FINRA’s Examination and Risk Monitoring Program
The Cybersecurity and Technology Governance, Communications with the Public and Anti-Money Laundering sections of the 2022 Report on FINRA’s Risk Monitoring and Examination Activities (the Report) informs member firms’ compliance programs by providing annual insights from FINRA’s ongoing regulatory operations, including (1) relevant regulatory obligations and related considerations, (2) exam findings and effective practices, and (3) additional resources.
RegTech (Regulatory Technology)
RegTech is a subset of FinTech, covering new and emerging technologies that assist the financial services industry in meeting its regulatory compliance obligations, in a faster and more cost-effective manner. Various RegTech applications are being explored by the securities industry including those for:
- Compliance monitoring and fraud prevention
- Data management (including access, storage, and reporting)
- Identification and interpretation of regulation
Artificial Intelligence (AI) generally refers to the “intelligence of machines” – i.e., science of computers performing tasks that are traditionally conducted by humans based on human intelligence. AI is rapidly being incorporated into various aspects of the financial services industry, ranging from personalized automated advice and chatbot customer service, to trading based on social media sentiment, to highly sophisticated fraud surveillance.
Social Media Sentiment Investing
Over the past few years, a new ecosystem of social media sentiment investing companies have emerged that aim to help investors predict market changes using social media sentiment analytics and facilitate communications through social networking platforms. Different business models within this ecosystem include:
- Social media data analytics companies: These companies generally use natural language processing technology to aggregate and analyze social media across various channels and identify early signals of market sentiment. Some broker-dealers are setting up strategic partnerships with such companies and providing access to their brokerage platform to allow individuals to trade based on the forecasted trends.
- Social media sentiment based product issuers: Some data analytics companies have developed indices to track social media sentiment, and a couple of issuers recently launched ETFs referencing such indices.
- Crowdsourced research networks: These companies operate websites that seek to crowdsource ideas either from the retail public at large or from the buy-side community. Some proprietary traders and hedge funds purchase such analysis to inform their trading strategies.
- Social networking platforms: Certain online brokerage websites offer social networking platforms for users to share and discuss trade ideas amongst themselves.
This webpage is for informational purposes only. It is not intended to express any legal position, and does not create any new legal requirements or suggest any change in any existing regulatory obligations, nor does it provide relief from any regulatory obligations. FINRA encourages firms to conduct a comprehensive review of all applicable securities laws, rules, and regulations, as necessary, when considering adoption of new technologies.