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PODCAST

FINRA’s Financial Intelligence Unit: Connecting the Dots

June 29, 2021

Intelligence means different things to different people. But for FINRA, at its most basic, it is the actionable information that allows employees, from an organization’s senior executives to its examiners or investigators, to make informed decisions.

On this episode, we sit down with Blake Snyder, Senior Director of FINRA’s Financial Intelligence Unit, to learn about this new group, and how it is looking to transform how FINRA takes in, analyzes, and shares data.

Resources mentioned in this episode:

Regulatory Notice 21-14: FINRA Alerts Firms to Recent Increase in ACH “Instant Funds” Abuse

Regulatory Notice 20-30: Fraudsters Using Registered Representatives Names to Establish Imposter Websites

Listen and subscribe to our podcast on Apple Podcasts, Spotify or wherever you listen to your podcasts. Below is a transcript of the episode. Transcripts are generated using a combination of speech recognition software and human editors and may contain errors. Please check the corresponding audio before quoting in print. 

FULL TRANSCRIPT 

00:00 – 00:24

Kaitlyn Kiernan: Intelligence means different things to different people. But for FINRA, at its most basic, it's the actionable information that allows employees, from an organization's senior executives to its examiners or investigators, to make informed decisions. On this episode, we sit down to learn about FINRA's new Financial Intelligence Unit and how it's looking to transform how FINRA takes in, analyses and shares data.

00:24 – 00:33

Intro Music

00:33 – 00:52

Kaitlyn Kiernan: Welcome to FINRA Unscripted, I'm your host, Kaitlyn Kiernan. I'm pleased to welcome back to the show an old guest in a new role. Today, joining us is Blake Snyder, senior director of the new Financial Intelligence Unit within Member Supervision's National Cause and Financial Crimes Detection Program. Blake, welcome back.

00:53 – 00:54

Blake Snyder: Thank you. Good to be here.

00:54 - 01:07

Kaitlyn Kiernan: So, Blake, the last time we had you on the show, you were heading up a different group in Member Supervision, the Anti-Money Laundering specialist team. Can you tell us a little bit about your new role in the Financial Intelligence Unit?

01:07- 02:37

Blake Snyder: Sure. So, intelligence is a new concept for FINRA, but I think, as everybody knows, it's been used for hundreds, if not thousands, of years in the government and the military realm. But increasingly businesses and in particular financial institutions have begun to incorporate intelligence into their business practice and with respect to financial institutions within their financial crime business units.

When Greg Ruppert, the EVP of National Cause and Financial Crimes Detection Programs, which we call NCFC for short, joined FINRA last year, he very quickly found that many of NCFC's operating units were performing some form of intelligence. However, there wasn't an established intelligence framework or process here at FINRA. Staff across NCFC and across the organization were frequently identifying risk and threats and trying to find avenues to deal with that information, but not really in a formalized way. And the work really wasn't part of their typical day to day job function.

So, after a significant amount of discussion and consultation, we decided to create a dedicated intelligence unit for FINRA and I agreed to move over from the AML team and to help build up the new Financial Intelligence Unit. We started in September of 2020 with just two of us, and now we're up to 6 team members.

02:38- 02:44

Kaitlyn Kiernan: So, what does intelligence and more specifically financial intelligence mean to FINRA?

02:45 - 05:47

Blake Snyder: So intelligence has been used for thousands of years in a variety of capacities, and I think the types of intelligence that we hear about most today in the news and on TV and in movies is intelligence conducted by governmental agencies such as the CIA or the DIA. One tactic these agencies do to gather intelligence is through covert means, for example, which is usually the spy type of work that you see highlighted in TV shows and movies. Those agencies need to go covert because they have a broader and more expansive remit than we do here at FINRA, namely protecting the country. Where at FINRA we're focused on the risks and threats that are posed to investors and the markets. The value that intelligence brings as being more widely understood and accepted. Businesses, including brokerage firms and other financial institutions, are increasingly adopting and implementing intelligence practices within their organizations.

Because FINRA's mission is focused on protecting investors and the integrity of the markets, our focus is on what we call financial intelligence. Broadly speaking, the intelligence process involves the assessment of conflicting pieces of incomplete information, the attempt to determine the correct items into a complete and understandable document that responds to the needs of the user.

The types of intelligence that we produce, and I think this is somewhat standard in the intelligence practice, are generally bucketed into two categories: tactical intelligence and strategic intelligence. Tactical intelligence is information that is provided to our stakeholders that can be used to enhance their day to day job responsibilities. An example of this could be a report describing a new trend we observe. So, our examination staff that's out there in the field every day examining firms and other issues can be aware of what this new trend is. So, in case they see it, they know what it is and they generally have an idea of how to deal with it.

Strategic intelligence is provided to management and policymakers so that they can use the information to help develop strategy and establish priorities. So, using the same example, we could highlight a new trend for our senior management so that they can make decisions on allocating resources and what issues they want to prioritize and their programs. So in that regard, it may be the same type of information that we're presenting directed to a different audience that's going to use it for a different purpose.

But just getting back to specifically what intelligence means for FINRA, we have a broad vision of what that means, of course, and that it's focused on protecting investors and the integrity of the market. The specifics of how we do that and what exactly we do, we're figuring that out on a daily basis, learning through doing, which has been really an enjoyable and empowering process to be a part of.

05:48 - 05:57

Kaitlyn Kiernan: And just to reassure our listeners, FINRA is not entering the spy game. Any comparison to the CIA would be on the analytics side, not the spying side.

05:58 - 06:19

Blake Snyder: We're really trying to figure out what intelligence means and how we can use it to provide the most value to our stakeholders, which, of course, is all of FINRA internally, but also our external stakeholders: investors, the industry and our counterparts that work for the regulatory agencies and in law enforcement.

06:20 - 06:27

Kaitlyn Kiernan: So, what does the day to day work of financial intelligence look like right now?

06:27 - 09:49

Blake Snyder: The process we've developed is really under what we're calling an intelligence assessment, and that can consist of a smaller tactical project where we're looking at one specific issue, or potentially a broader strategic initiative. But regardless, the process for those is very similar.

First, what we do is we speak to stakeholders to gather what information we may need. FINRA has a lot of different operating units that have a lot of built of expertise. We don't want to recreate the wheel on anything. So, we speak to those stakeholders to see what they know, talk to them about their concerns, and then we can take that information and incorporate it into our plan. This may also include speaking to external stakeholders such as brokerage firms, other regulators or investor groups to gather information that they have and hear what concerns they have.

The next step, when we're developing our plan, we have to figure out, well, what other information do we need to collect to make sure we have a full understanding of whatever the topic is. Usually that includes gathering data. So going out and trying to find where that data exists, how do we best obtain that data? How much of the data do we need? Because we don't want to take in too much that it becomes unmanageable. And then what is our plan for analyzing that data?

Then we'll do that analysis, come up with some initial determinations as to what we may want to do, how do we present? And the big question there is, who needs this information? Who would benefit from this information and how can we give it to them in a way that's most useful? An examiner may need information presented in one way where an enforcement investigator may need it presented in a different way. So, we really try to tailor our communications to the audience that we're speaking to and tailor the information that we're providing to them.

Usually the information that we provide takes the form of what we call an intelligence report. Those are distributed internally to FINRA staff only. But we do also send referrals to other regulators and law enforcement and work with our investor education team. And also, as we've done in the past, issuing Regulatory Notices and other notifications to the industry, alerting them to trends and other issues that we're seeing.

One thing we're emphasizing is that not every risk or threat that we encounter needs to result in some sort of a regulatory response, such as an exam or something that would result in a disciplinary action. A lot of the fraud and misconduct that we're encountering these days is perpetrated by unregistered third parties who are not under the control of firms. And really what we're seeing in some cases is the firms and the individual registered representatives that are employed by those firms, may be even the victims of this third-party fraud.

So we're really taking a holistic look at the threats and the challenges that face the industry, that face the markets, that face investors and trying to figure out what is the best outcome or what is the best outlet that we can provide information to, to have the most impact.

09:50 - 10:01

Kaitlyn Kiernan: So it seems like a good example of that would be the recent Regulatory Notice on ACH transfer fraud. It's not a regulatory response, but it is sharing information about something that you're seeing out there.

10:02 - 11:37

Blake Snyder: Yeah, that's a great example. And that started from conversations that we were having with firms and information that firms were reporting to us. Just generally what the Regulatory Notice, 21-14, that we put out concerns what's called ACH instant funds abuse, which is a form of freeriding. Where basically a customer opens a new account and places the trade without the intention of ever paying for that trade. So, if the price of the stock goes up, they try to immediately sell and take out the funds without ever contributing any funds of their own to pay for the trade. Or if the price goes down, they just walk away.

And this has been something that has been an issue that the industry has dealt with for a number of years, probably decades. But with the increased use of ACH transfers to fund brokerage accounts, this is a different variation of it. And firms were telling us that they've experienced this type of abuse historically, but really at lower levels. But in late January and early February, they were reporting significant spikes in these occurrences.

So, what we were able to do is have some really in-depth conversations with those firms, get a full and complete understanding of what the issue was. How different firms are dealing with it. Discuss with our stakeholders here internally and put out a notice for all firms trying to let them know what we were hearing so that they can be prepared and be on the lookout for it and potentially take some steps to mitigate that.

11:38 - 11:46

Kaitlyn Kiernan: And how is the Financial Intelligence Unit impacting the way information is being communicated across FINRA and its different business units?

11:47 - 14:11

Blake Snyder: We have a lot of different groups within FINRA doing a lot of really outstanding work that have built up a lot of expertise over time. So, they come across information that may be helpful for other teams. So, they may not have a full understanding, for example, of what someone does in their day to day work sitting in another group, or what information that that other group might find valuable and their day to day work.

So I think that's a role that we can play is talking to the different operating units within FINRA, finding out what issues they're seeing and then going out and being the information facilitator for them and going out and finding, OK, which groups need this information and how can we best give it to them in a way that's useful for them. We don't want to be in a position where we're just going out and doing data dumps on different groups and giving them information that they don't need. We want to be helpful.

So we're able to take information from one team, reconfigure it in a way that's helpful for other teams and have a general understanding of what other groups might benefit from that information. So that's been something that, coming into it, I don't think we anticipated that we would play such an important role in this function. But it has been something that's been a really great experience.

We're able to look at that data and look at those systems and ask the question of, hey, how can we use this in a different way? If we look from a different angle or a different perspective at this data, would we be able to use components of this to help feed information to other teams and help distribute helpful information to other groups within FINRA? So we're able to look at that and talk to the teams and say, hey, you have this data in your system. Just looking at it from a different perspective, we're able to take this and give it to another team who would find that information valuable. That could be the market data that FINRA receives, whether it's trades or orders or market maker quotations. The data that we receive on private placements and public offerings is a good example that we're actively engaged in currently. And also, I should add, the open source information, which is a really important piece of what we do, which is basically anything that's available out there freely on the Internet.

14:12 - 14:21

Kaitlyn Kiernan: I imagine you are working very closely with Kerry Gendron and the data analytics team that is also a new group within Member Supervision?

14:21 - 14:41

Blake Snyder: Yes, I would say almost on a daily basis, they've played a really critical role in our success and helping us to develop new tools to help bring in different components of information so we can look at it a little bit differently and try to help in addressing new risk or trend or threat.

14:42 - 14:59

Kaitlyn Kiernan: So you mentioned a lot of the data that FINRA already just brings in in the course of its day to day work, but is the Financial Intelligence Unit doing anything to look for ways to more proactively go out and find data and find the fraud before it's reported to FINRA?

15:25 - 16:13

Blake Snyder: Yes, we are, and I think that when Greg Ruppert established our team, that was something that was key on his mind. We have a lot of established processes for the intake of information and events. Customers can complain directly to us. Individuals can file tips anonymously. Firms can self-report violations. And I think we've developed and become very good at that intake process and dealing with triaging those events.

One of our goals is to not just be content on receiving information, but going out and trying to proactively find risks and threats that exist out there. And the question that we're always asking ourselves within my team is how can we go out and do that and find issues and problems before they get reported to us? Because usually by the time it gets reported to us, it's a problem. Somebody has been harmed. But if we can be proactive and go out and find these problems, hopefully before they become problems or before they become big problems, I think we can really have a significant impact on investors and on the market.

16:14 - 16:37

Kaitlyn Kiernan: I want to transition now to talk more about the work of your team in action. We mentioned the ACH transfer abuse earlier, but last August, FINRA also published Regulatory Notice 20-30 warning firms and investors about imposter websites claiming to be registered representatives. Can you tell me a little bit more about that?

16:38 - 19:12

Blake Snyder: As I mentioned before, we receive complaints from investors and sometimes even from brokers and firms, and what was being reported to us was that they were seeing an increase in imposter websites set up in the names of registered representatives. We'd seen this historically affecting individual member firms, but not as much in the names of actual brokers.

So what the websites were trying to do is help drive traffic to one or more other fraudulent investment websites where investors could purportedly invest in things like crypto options or forex trading that were just scams to steal investor money. And they would use the imposter websites to help try to build credibility and to tell the unsuspecting investor, hey, I'm a registered broker with so-and-so firm. You can trust me, I am regulated and my firm is regulated. But here, go check out my investment website where you can invest in some random type of investment. And that was really just an outright fraud.

So as these were being reported to us and we saw this spike, we issued the Regulatory Notice that you reference: 20-30. And not being content with information that's just being reported to us, we asked ourselves the question, well, how could we go out and proactively find these websites, hopefully before somebody becomes a victim of the website? And then the idea was we could identify these sites, take the identification of those sites to the firms that employ the registered representatives that are being victimized by these sites because it impacts all of us. And we have investors that complain about these sites to us that really think that it's the broker that they're talking to.

Having this information being reported to us, we're able to look at the sites that we know have been identified, look for commonalities, and then take that information and use that and try to find other fraudulent imposter websites. And this is something that there's not an examination response here because it's unregistered third-party actors who are misusing the names of individuals and brokerage firms to try to steal from investors.

I think it's something that firms and brokers and FINRA are all aligned in in terms of wanting to put a stop to this. And we want to try to do whatever we can to identify these sites, notify the firms, and also to help them take the sites down.

19:13 - 19:25

Kaitlyn Kiernan: Well, it's great that you've been able to do that proactively. Earlier you mentioned private placement data as something that you look at. What kind of data are you using and how can that help in that space?

19:27 - 21:04

Blake Snyder: So FINRA has rules that require that the vast majority of private placements that are sold through broker dealers, that the private placement information be filed with FINRA by the firms that are selling those offerings. However, we found circumstances where private placements are being sold by individual brokers, not necessarily through their firms, that aren't being reported to FINRA. And that's really the area that we want to target. And so we're looking for ways to identify that scenario.

Not all private placements are bad. We're not saying that. Because it's not being reported to their firms, because it's not being reported to FINRA, there's not a whole lot of eyes on this activity, presumably. So we're looking at various methods to identify those, particularly focused on private investment funds that may be managed by registered brokers, but they're not informing their firms about those funds. And because of that, the firms are not reporting those offerings to FINRA. It's not that we're going out and doing this work saying that every scenario that we identify is some sort of a problem. But in our view, it's a risk that we want to get a better handle over and try to be able to make an assessment. Well, OK, we found this private placement or we found this investment fund that a broker appears to be selling or managing. Let's take a deeper dive into it. Is it disclosed to their firm? Is it disclosed to FINRA? Is somebody else already looking at this? And if not, then we can take a deeper dive from there and see what we want to do with that information.

21:01 - 21:32

Kaitlyn Kiernan: Well, that's it for this episode of FINRA Unscripted. Blake, thank you so much for joining us to introduce us to the new Financial Intelligence Unit, it was fun to learn about. Listeners if you don't already, be sure to subscribe to FINRA Unscripted wherever you listen to podcast and to stay up to date on all the work of the Financial Intelligence Unit and all of FINRA's other business units. If you have any ideas for future episodes or thoughts to share on today's episode, you can email us at [email protected] Until next time.

21:32 – 21:38

Outro Music

21:38 - 22:01

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