Enhancing Our Enforcement Program
By Bill St. Louis, Executive Vice President, Enforcement
Last year, FINRA announced FINRA Forward, a series of initiatives to further improve our effectiveness and efficiency in pursuing our mission of investor protection and market integrity, while promoting our vibrant capital markets.
Each part of FINRA has its own role to play in supporting FINRA Forward, and FINRA’s Enforcement team is no exception. Over the last year, we have begun instituting common-sense improvements to our enforcement program, guided by FINRA’s mission and three main goals:
- Drive more transparency
- Improve our efficiency
- Give member firms more opportunities to be heard
By enabling faster, more efficient resolution of issues, these enhancements will ultimately strengthen investor protection and market integrity—our core mission. These enhancements will also support FINRA’s integrated approach to oversight, where we use all of our tools—from risk monitoring to examinations to market surveillance—to identify issues and mitigate risks as early as feasible, to the benefit of both investors and our member firms.
In developing these enhancements, we have benefited already from the extensive feedback gathered by former SEC Commissioner Troy Paredes of Paredes Strategies and Professor Paul Eckert of William and Mary Law School, who are separately looking to identify and assess opportunities for our enforcement function. While we look forward to their final assessment, our dialogue with them to date has been invaluable to calibrating changes already in process and catalyzing additional improvements.
I want to share some examples of recent enhancements that we believe have and will continue to advance our three goals—with more improvements to come.
Drive More Stakeholder Transparency
While there is transparency about FINRA enforcement outcomes, including publishing detailed disciplinary information and annual statistics on our website, the transparency of the process is also important for respondents’ planning and for our accountability. We have implemented a number of enhancements with this goal in mind, from the time a matter comes onto the docket until it is resolved. These enhancements provide firms with clearer expectations at every stage of an enforcement matter and ensure open communication. As a self-regulatory organization, there should be no surprises throughout the process.
Starting at the beginning of the enforcement process, we now offer an introductory meeting for potential firm respondents where they can meet with the Enforcement staff assigned to their matter. This introductory meeting creates an opportunity for Enforcement staff to provide an overview of the enforcement process and a view into our initial areas of focus. It also provides the opportunity to address any questions the firm may have and to listen to any observations or concerns the firm may share. This meeting is offered to firms in the initial notification letter that goes out to potential respondents when a matter has been referred to Enforcement.
Similarly, it is important for potential respondents to understand where we are in a matter’s life cycle. To that end, we now require Enforcement staff to provide status updates to potential respondents at least every 90 days. We have developed an internal tool to help support consistent communication with potential respondents. These regular touchpoints ensure potential respondents are not left wondering about the status of their matter.
We also saw room to enhance transparency toward the conclusion of an investigation—prior to resolution. We now offer member firms an additional meeting at or near the conclusion of our fact finding where we share our investigative findings and the evidence underlying those findings. This discussion eliminates any surprises once formal charges are proposed. During this meeting or thereafter, member firms have the opportunity to provide their view of the facts and evidence, as well as any mitigating factors or additional context they believe Enforcement should consider when determining next steps. This meeting does not replace the Wells process.
Improve Our Efficiency
Efficient enforcement is essential for the timely resolution of issues that can put investors and markets at risk. It also can help conserve both FINRA and member firm resources and support predictable outcomes that can better guide compliance programs.
We have introduced several enhancements to support efficient enforcement operations, most prominently a specialization program to support more complex matters—including matters involving systemic anti-money laundering and market-related issues. Currently, we have 11 specialization areas. While general matters will continue to be assigned to any team across the department, this initiative allows us to assign matters requiring specialized knowledge to staff with deeper expertise and experience. It also allows for improved internal collaboration that drives efficiency and consistency across similar cases.
We also introduced a new pilot program related to a firm’s obligation to promptly self-report certain rule violations under FINRA Rule 4530(b). Under this pilot, we are reviewing Rule 4530(b) filings and, in appropriate matters, engaging in dialogue with firms about their self-reports before launching an investigation.
A firm that discovers and self-reports an issue can be well situated to undertake a thorough internal review. If a firm needs time to conclude that process, a schedule for ongoing status updates to FINRA on the progress and outcome of the internal review will be established. Member firms would conclude such work without a concurrent FINRA investigation, and, depending on the findings and the firm’s remediation, a full Enforcement investigation may not be warranted.
The pilot framework will not be appropriate in all circumstances, such as where there is ongoing harm to investors or markets, and it will not preclude FINRA from conducting its own investigation later where our mission requires it. However, in many cases, we believe this approach will ultimately expedite the remediation of issues and empower member firm compliance.
Give Firms More Opportunities to Be Heard
We also have focused on when and how a member firm has opportunities to express its views. These opportunities are essential to bolstering the fairness of our process and ensuring that Enforcement has complete information in making disposition decisions. For example, our attorneys now reach out before issuing a Cautionary Action Letter (CAL). This practice allows for discussion of the preliminary findings and gives firms and individuals the opportunity to provide context or challenge any conclusions before the informal disciplinary resolution is determined. In non-exigent instances, our attorneys will also reach out to member firms or their counsel before issuing a FINRA Rule 8210 request for information to the member firm. Such outreach gives the parties the opportunity to clarify the scope and expectations and ask questions.
Separately, we increased the standard amount of time given for potential respondents to provide a Wells response to 30 calendar days. This ensures that potential respondents have substantially more time to make a meaningful submission.
Next Steps
We worked quickly to turn these ideas into action, and so far, the feedback from member firms has been positive. For our part, we have observed these steps improve our efficiency, particularly in the handling of complex matters and supporting consistent outcomes. That said, these are just initial steps, and our commitment to improvements to our enforcement program will continue to guide future enhancements.
In the months ahead, we plan to issue guidance clarifying our approach to how we grant credit for cooperation and remediation. We also plan to update the information about our current enforcement process on our website to provide a view into the checks and balances involved throughout to ensure fair, consistent, and foreseeable outcomes. Additionally, we are looking at how we gather information through FINRA Rule 8210 requests and are exploring alternatives to on-the-record testimony in the right instances. And, while it will take more time, we expect to publish an enforcement manual.
Finally, we look forward to the assessment of Messrs. Paredes and Eckert. We expect their assessment will yield additional improvements that help us further advance our goals of transparency, efficiency, and fairness. We expect to share the results in the second quarter of this year.
We are committed to continuing to share our progress on this mission-critical work and look forward to ongoing engagement with member firms, investor groups, our fellow regulators, and others.