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FinTech

FINRA’s Office of Financial Innovation (OFI) is the central point of coordination for issues related to significant financial innovations by FINRA member firms, particularly new uses of financial technology (FinTech). To achieve this, OFI initiates outreach with various stakeholders, trains FINRA staff, publishes and disseminates timely research and publications, maintains internal coordination across FINRA departments, and collaborates with other regulators on matters related to FinTech.

Haimera Workie, who serves as Head of the Office, leads OFI in its efforts to understand and address issues related to FinTech, identifying and analyzing emerging trends in the securities industry, and facilitating awareness of and responses to these issues.

As the number and scale of FinTech innovations in the securities industry continues to grow, the business models and operations of firms within financial industry continue to change. For example, a number of FinTech firms are pioneering innovative products and developing financial service solutions utilizing technologies such as machine learning, cloud computing, and blockchain technology.  In addition, many traditional financial service providers are rethinking their existing models by incorporating new technologies to alter how they interact with clients, conduct trades, and monitor for regulatory compliance.

As a result, FinTech is transforming various broker-dealer business lines including investment banking, wealth management, trading, and research. All of these FinTech-related changes contribute to an evolving landscape for broker-dealers’ operations.

Going forward, FINRA will continue to engage in an active dialogue with various industry participants including broker-dealers, regulators, investors, and other stakeholders to assess the impact of various emerging FinTech-related business models on both broker-dealers and investors. Through these efforts, we endeavor to obtain knowledge and insight to enhance our ability to facilitate innovation in a manner that supports investor protection and market integrity.


Contact OFI and OGC

FINRA's Office of General Counsel (OGC) staff provides broker-dealers, attorneys, registered representatives, investors and other interested parties with interpretative guidance relating to FINRA’s rules. Please see Interpreting the Rules for more information.

OGC staff contacts: Kosha Dalal and Racquel Russell

OFI contact: Please contact FINRA’s Office of Financial Innovation with any questions or comments.


Important Note

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.

The following are some key Fintech areas monitored by FINRA that are impacting the securities industry:

DIGITAL ASSETS

The term “digital asset” generally refers to cryptocurrencies and other virtual coins and tokens (including virtual coins and tokens offered in an initial coin offering (ICO) or pre-ICO) and any other asset that consists of, or is represented by, records in a blockchain or distributed ledger – including securities and non-security products.

The market for digital assets has grown significantly and has increasingly been of interest to retail investors. At the same time, investor protection concerns exist, including incidences of fraud and other securities law violations involving digital assets and the platforms on which they trade. FINRA has been closely monitoring these issues as broker-dealers, regulators, and investors together face unique challenges and opportunities.

FINRA continues to provide guidance on digital assets through various methods, including its joint statement on Broker-Dealer Custody of Digital Asset Securities and white paper on Distributed Ledger Technology, as well as seek industry input through Regulatory Notice 19-24. In addition FINRA keeps investors informed through investor alerts, such as those on initial coin offerings, bitcoin, and crypto-related stock scams.

REGTECH (REGULATORY TECHNOLOGY)

Regulation is a fundamental pillar of financial services, ensuring investor protection, and market integrity. Increasingly, these firms are turning to innovative regulatory technology (RegTech), whose application include compliance monitoring, fraud prevention, data management (access, storage, and reporting), and identification and interpretation of regulation.

RegTech tools offer the potential to help firms meet compliance obligations in a faster and more cost-effective way, but may also pose several unique challenges. FINRA published a white paper on RegTech to provide firms with a roadmap of key regulatory and implementation considerations as they explore RegTech tools. In addition, FINRA hosted a RegTech Conference and published a RegTech podcast to facilitate a dialogue amongst regulators, thought leaders, and practitioners on the topic.  

Artificial Intelligence

Artificial Intelligence (AI) generally refers to the “intelligence of machines,” or the science of computers performing tasks that have been traditionally performed by humans based on human intelligence. AI is generally used as umbrella term to encompass various types of specific technologies such as machine learning, deep learning, and natural language processing.   AI, in its various forms, is rapidly being incorporated into the financial services industry, ranging from automated customer service applications and social media sentiment-based trading to sophisticated fraud and financial crime surveillance.

FINRA is engaging in an active industry outreach, to better understand the various AI applications explored by the securities industry, the benefits offered by such applications, as well as related challenges such as supervision of AI-based tools. FINRA published Special Notice 7-30-18, seeking comments from the industry on the topic.

Digital Investment Advice

Digital investment advice generally refers to digital tools that help automate the process to develop an investor profile, to prepare proposals and sales materials, to develop an asset allocation, and to recommend specific securities to an investor. Those recommendations may be for individual securities, a customized portfolio, or a pre-packaged portfolio for investors with a given profile. These investment advice tools can be used by financial professionals or by clients, with many client-facing tools often referred to as “robo advisors” or “robos.”

For more information, please refer to the FINRA white paper on Digital Investment Advice, as well as investor alerts on automated investment tools and SEC guidance on robo advising.

Cybersecurity

Cybersecurity generally refers to the information-security controls at securities firms. FINRA expects that broker-dealers, regardless of size, develop their cybersecurity programs. This includes but is not limited to cybersecurity controls in branch offices; methods of limiting phishing attacks; identifying and mitigating insider threats; penetration-testing programs; and establishing and maintaining controls on mobile devices.

To support efforts to protect data and the systems on which it is stored, FINRA has issued a number of information notices to raise awareness on imposter websites, fraudulent phishing emails, and distributed denial of service attacks. FINRA investor alerts also serve as additional resources, covering tips for investors to protect their financial data, as well as the questions they should raise with their brokerage to better manage their data.

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 have emerged in this space, including social media data analytics companies, social media sentiment based product issuers, crowdsourced research networks, and social networking platforms offered by online brokerages. While these tools may offer some benefits to investors and other market participants, they also pose several risks. For more information, please see FINRA’s investor alert on social sentiment investing.

News Release | Request for Comments

FINRA Hosts First RegTech Conference

On January 16, FINRA convened its first ever RegTech Conference in New York City. Regulators, academics and innovators came together to discuss how technology is creating a new landscape for compliance efforts in financial services. New opportunities are quickly becoming available for industry participants and new challenges are arising for regulators. Issues like machine learning, artificial intelligence and anti-money laundering all played key roles in discussion throughout the day.

New York Roundtable – April 12, 2018

On April 12, 2018, FINRA hosted a FinTech roundtable in New York focused on RegTech, Personal Financial Management and Data Aggregation.

Dallas Roundtable – November 30, 2017

On November 30, 2017, FINRA hosted a roundtable in Dallas on Big Data Analytics, RegTech, and Initial Coin Offerings (ICOs).

San Francisco Roundtable – September 29, 2017

The purpose of the roundtable was to facilitate a dialogue with industry members and other stakeholders that will help FINRA better understand FinTech innovations and their impact on the industry. During the roundtable, there were participant-led discussions focused on 1) artificial intelligence and its impact on financial services; 2) the impact of FinTech on the securities industry; and 3) regulatory technology (RegTech). 

Blockchain Symposium – July 13, 2017

FINRA’s Blockchain Symposium was designed to bring together regulators and industry leaders to discuss the use of blockchain and related opportunities and challenges. The half-day symposium looked at the changes that are occurring or may occur in the future as a result of the implementation of DLT applications in the financial industry. It also featured discussions of the potential market and regulatory implications of these changes.

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The FINRA FinTech Industry Committee, was created to advise FINRA on FinTech developments. 

The committee’s members are drawn from member firms, academia, and industry participants, in addition to observers from Securities and Exchange Commission (SEC) and North American Securities Administrators Association (NASAA).

The committee provides FINRA, member firms and others with a platform for ongoing dialogue and analysis of FinTech developments, including with respect to their potential impact on FINRA’s investor protection and market integrity objectives; challenges to the adoption of FinTech-based products or services; opportunities to improve interactions between FinTech firms and FINRA to support innovation that is consistent with FINRA’s investor protection and market integrity objectives; and possible FINRA FinTech initiatives.

Committee Members:

Jo Ann Barefoot
Barefoot Innovation Group, LLC

Mark Casady
Vestigo Ventures

J. Todd Cook
JP Morgan Chase & Co.

Robert Dearman
F3Logic, LLC

S. Chad Estep
E*Trade Financial Corporation

Ryan Feit
SeedInvest

Alexander C. Gavis
Fidelity Investments®

Joshua Hershman
Trumid Financial LLC

Boris Khentov
Betterment Securities

Jennifer Peve
DTCC

David L. Shrier
MIT Media Lab
Distilled Analytics, Inc.

Steven M.H. Wallman
FOLIOfn, Inc.

Observers:

Valerie Mirko
North American Securities Administrators Association (NASAA)

Valerie A. Szczepanik
U.S. Securities and Exchange Commission (SEC)