Report from External Review of FINRA’s Enforcement Program

By Robert Cook, President and CEO, FINRA

Last year, as part of FINRA Forward, FINRA engaged two outside experts, Professor Paul R. Eckert of William & Mary Law School and former SEC Commissioner Troy A. Paredes of Paredes Strategies, to identify potential improvements to FINRA’s enforcement function to better serve our self-regulatory mission of protecting investors, safeguarding market integrity, and supporting vibrant capital markets in which everyone can participate with confidence.

Today, FINRA published a Report from Messrs. Eckert and Paredes setting forth their recommendations. We welcome these recommendations, which reflect a thoughtful evaluation of FINRA’s enforcement program informed by feedback from various stakeholders. Taken as a whole, the Report identifies important strengths for FINRA to build upon (including recent enhancements to the enforcement program) and new ideas for FINRA to utilize as we strive for continuous improvement.

Now that the Report has been finalized, the next stage of FINRA Forward in enforcement begins. FINRA is committed to drawing on these recommendations to strengthen our enforcement program, make necessary changes, and ensure it is operating in a fair, transparent, and effective manner. As the Report suggests, we will consider the recommendations both individually and holistically, and our work will be guided by several overarching themes highlighted in the Report.

• First, as the Report emphasizes, FINRA’s role as a self-regulatory organization (SRO) warrants a distinct regulatory approach. Among other things, effective self-regulation is informed by industry expertise and feedback; focuses on enabling members to better serve investors and uphold shared standards in the industry; and emphasizes education and outreach to help identify and address areas warranting heightened attention. The goal is to address risks to investors and markets before disciplinary action is required, while being prepared to vigorously pursue such action where appropriate. In responding to the recommendations, FINRA will consider how best to achieve the promise of the SRO model.
   
• Second, consistent with FINRA’s broader SRO role and responsibilities, we will consider the implications of these enforcement recommendations for our other regulatory functions. FINRA’s enforcement group works in close coordination with our risk, examination, surveillance, investigation, and intelligence teams. Most enforcement matters originate as referrals from these areas. It is therefore not surprising that various recommendations address interactions between enforcement and these other functions, or suggest enhancements that may also apply to them. Our recent initiative to create a consolidated Regulatory Operations department that brings all these functions together within a coordinated governance structure provides an important and timely vehicle to consider the applicability of these enforcement recommendations to our broader self-regulatory programs. 
   
• Third, as noted in the first recommendation, the principles that guide enforcement and related functions matter and should be clearly articulated. We have highlighted a number of principles before—including operating an effective, fair, and consistent program that achieves certain key objectives. As recommended, we will consolidate and expand on our prior statements in a public enforcement manual and in our training programs to address, among other principles: the vital role of enforcement in preserving the integrity of the SRO model and investor confidence; the need to consider, as noted above, the distinguishing features of self-regulation; when resolving a particular matter, the importance of focusing on the right outcome in that matter rather than any implications for broader activity-based metrics (e.g., case numbers, fine amounts); the benefits to FINRA’s mission of addressing violations or compliance shortcomings expeditiously, prioritizing restitution for investors, tailoring outcomes to what is most consequential, and deploying resources effectively; and the need to consider whether there is sufficient ambiguity regarding applicable regulatory requirements to warrant rulemaking or interpretive guidance rather than disciplinary action.
   
• Finally, as CEO I will be working closely with Greg Ruppert, Chief Regulatory Operations Officer, and Bill St. Louis, Head of Enforcement, to guide our response to the Report and (as proposed in the second recommendation) to engage more directly in enforcement’s internal operations and decision-making—all to support the overall governance of the program and help ensure that outcomes are aligned with our guiding principles and objectives. In addition, FINRA’s Board of Governors—which has been briefed on the Report—will be monitoring our approach to the recommendations and will continue to enhance as appropriate its governance and oversight role with respect to the enforcement program.

Due to the breadth and complexity of the recommendations, and their connection to various parts of our regulatory operations, it will take time to address them in a thoughtful and comprehensive manner. We will provide updates on our work in the FINRA Forward section of our website, where we share enhancements already made to the enforcement program—many of which align with areas of focus in the Report. We will also continue to provide updates on FINRA Forward more generally, such as a recent progress report and a quarterly regulatory policy agenda. 

I want to express my appreciation to Messrs. Eckert and Paredes for their valuable insights, thoughtful analysis and constructive engagement with FINRA and our many stakeholders. Similarly, I thank the various parties both within and outside our membership who took time to provide feedback in this process to help improve FINRA’s enforcement program. 

Finally, I thank Bill St. Louis and his team for their ongoing commitment to enhancing the enforcement program. They and the rest of FINRA’s staff work hard every day to promote investor protection, market integrity, and vibrant capital markets. Their openness to engaging with this process and responding to feedback is a testament to their professionalism, dedication to our mission, and commitment to continuous improvement.