House Financial Services Subcommittee on Capital Markets, and Investments Hearing
Chairman
On behalf of the
Since the last time that
Before outlining
But the
History of
Strong, vibrant securities markets are central to the
As the SRO for more than 3,700 securities firms, nearly 160,000 branch offices, and over 630,000 individuals,
Working with securities exchanges,
These and other programs we operate--from comprehensive trade reporting to detailed public disclosure systems to licensing examinations--advance our mission by protecting investors and preserving market integrity. And they do so in many ways, from promoting compliance with applicable rules, to creating a level playing field for market participants, to stopping bad actors, to enhancing transparency and access to information.
SROs like
As an SRO,
A critical feature of the SRO model is oversight by the
. approves or disapproves
. can abrogate, add to, and delete
. hears appeals of
. requires
. inspects
While the
We welcome this oversight by the
FINRA360
As I noted above, this summer marks an important milestone in
Since joining
FINRA360 is a multi-year exercise focused on creating an organization that is committed to continuous improvement. n3 It provides a framework for processing the internal and external feedback we continue to receive, engaging in a thoughtful analysis to determine whether there are opportunities for improvement, and making changes that will produce a more effective, more efficient
With FINRA360, there are several broad principles that are being used to guide our work. Most importantly, we must remain focused on how to best fulfill our core mission--promoting investor protection and market integrity while facilitating vibrant capital markets. Potential changes must be evaluated based on the extent to which they will advance these goals.
In addition, our thinking should consistently reflect our identity as an SRO.
FINRA360 will take time--a comprehensive and thoughtful review of our entire organization requires no less. But we are not waiting until all of the work is complete before we implement any changes, some of which are already underway. More than a set of specific proposals, FINRA360 provides a process for carefully considered--but ambitious--changes and improvements throughout
Enforcement Restructuring
Since its creation,
In July, after careful consideration, we announced our plan to combine our enforcement programs and named a new Director of Enforcement, bringing together these teams. In addition, the Director now reports directly to me and also sits on
Engagement and Transparency
Another example is engagement. In all of our initiatives and programs,
That is why we issued a Special Notice on Engagement earlier this year to better understand how our existing mechanisms for soliciting input from members, investors and the public--and there are many--work and how they can be improved. n4 Improving these mechanisms in turn will help us better collect and consider feedback on the many other areas that we are reviewing under FINRA360. The comment period for this Notice recently ended, and we are reviewing the comments received, which are publicly available on our website.
Other Recent FINRA Initiatives
Our initiatives over the last year demonstrate both the breadth of
Transparency for Treasury Market Regulators
On
By leveraging the existing TRACE system for the regulatory reporting of
Expanding TRACE to cover
Although expanding TRACE reporting for
Protections for
Another successful recent initiative has been
In one example, a 92-year-old woman contacted the
To date, the
Technology-Driven Innovation in Regulation
Technology is vital to
In addition,
In addition, cloud technology has improved
Finally,
Innovation Outreach Initiative
In order to further develop these efforts, we recently launched the FINRA Innovation Outreach Initiative which will engage with those in the securities industry seeking to develop or use new financial technology applications and other innovations. n8 This initiative will help
Broker-Dealer Oversight
All of these recent initiatives are examples of how
Examinations
In 2016,
In
Compliance Tools and Resources
For example, we recently launched a new Compliance Calendar and Vendor Directory, which are both designed to help industry participants fulfill their compliance responsibilities. The Compliance Calendar is a way for firms to keep track of not just upcoming filing requirements and other significant deadlines, but also educational opportunities. The Compliance Vendor Directory is designed to help firms more easily locate compliance-related vendors, such as compliance consultants, cybersecurity experts, and exam prep resources.
Another initiative to aid compliance is the Cross-Market Surveillance Report Card, which we launched last year. Although firms generally review trades for manipulation, abusive traders can be very good at concealing their activity by trading across multiple firms, markets, and products. These new report cards do not reflect conclusions that violations have occurred. Rather, they indicate potential problems that a firm should review.
Firms can use this information to upgrade internal controls and address any problematic areas. And there is evidence that this approach works. In
Another new compliance tool that we have committed to providing is an exam findings report. Firms can get an individual report after any
In addition, OFDMI conducts robust cross-market surveillance for potential insider trading and fraud OFDMI also coordinates with Enforcement and other
Stopping Bad Actors
One of
Given how challenging it can be to identify brokers prone to abuse customers, and how important it is to do everything we can to prevent them from harming investors in the last few years
This heightened scrutiny has had an impact. Of the firms assessed as highest risk in the last five years, more than 40 percent are no longer in the business, in many cases because of regulatory action. In other cases, close scrutiny by our examination team has caused firms to take steps to address our concerns, such as by making changes or improvements in personnel, operations, and the quality of their supervisory controls.
It is important to be clear about the challenges and limitations inherent in identifying high-risk firms and brokers. Care is required both in how we conduct the assessment and in what we do with it.
Earlier this year,
Registration and BrokerCheck
Market Oversight
As noted in
Cross-Market Surveillance
In addition,
In order to protect investors and market integrity, it is important that
The Consolidated Audit Trail (CAT), mandated by the
Dark Pool Volume Transparency Initiative
With well over 30 percent of total national market system (NMS) volume now being executed off of
In
Enforcement
One of
Enforcement team members investigate potential violations of
Some of Enforcement's most important actions involve individual brokers who have harmed investors and in some cases posed a risk to the broader marketplace. In 2016, we barred 517 individuals for egregious violations of the securities laws and
We also suspended or expelled 50 firms from the industry in 2016. These cases concerned a wide range of trading and sales practice issues.
Equally important, in the last two years (not including 2017), we have ordered some
Rulemaking
We also must carefully assess the impact of our rulemakings for potential impacts on stakeholders, including investors and the firms we supervise.
Capital Formation and Rule Modernization
As we take a fresh look at our operations, we also are looking at our rulebook to identify opportunities for improvement and to ensure that we are appropriately accounting for changes in the regulatory environment and market practices. Earlier this year, for example, we issued a formal request for comment on all of our rules, operations, and administrative processes related to capital-raising and how they might impact capital formation. n13
A vibrant capital-raising process supports both large and small businesses, creates jobs, strengthens the economy and serves the interests of investors. Broker-dealers perform an important role in capital raising, but the process is evolving and it is essential that our supervision also evolves where appropriate to ensure that important investor protections are preserved without needlessly interfering with capital formation. There have been significant developments recently in the mechanisms companies use to raise capital through securities offerings, including new rules and regulations regarding crowdfunding, exempt offerings under Regulation A, and private offerings under Regulation D.
In addition, in the last few years
We have also sought to update our rules on broker registration to reflect feedback about how those rules have operated over time as markets and firms have changed. Recently, the
Retrospective Rule Review
Reviewing our rules and how we implement them is part of the FINRA360 goal of continual self-improvement. Changes in the industry and markets can affect whether a rule continues to achieve its original objective as well as the burdens it imposes on firms or investors. Regular rule reviews can help us understand whether rules can be made more effective and less burdensome, and also identify gaps and areas where investor protections can be strengthened.
In 2014,
These retrospective reviews can result in significant changes. For example, as part of the review of the rule set regarding communications of
Most recently, we launched a new review of our rules regarding outside business activities and private securities transactions, an area where we have received considerable feedback from our members and other stakeholders. It had been some time since we issued guidance on these rules, and we continue to look for public feedback on their operation.
Dispute Resolution
Since 2011,
In
In 2003,
Investor Protection Campaign
A sampling of recent IPC accomplishments includes the following:
. From 2012-2017, the campaign has enabled more than 908,000 vulnerable investors to be counseled by
. More than 2,100 law enforcement professionals and victim advocates have been trained by the Foundation to detect, prevent and respond to financial fraud.
.
Investor Education
Investor education is a potent form of investor protection, and
Since its inception, the
Conclusion
n1 S. Rep. No. 1455, 75th Cong., 3d Sess. I.B.4. (1938); H.R. Rep. No. 2307, 75th Cong., 3d Sess. I.B.4. (1938) (duplicate text quoted in both reports).
n2 S. Rep. No. 94-75, 94th Cong., 1st Sess. 7, II (1975).
n3 See: www.finra.org/about/finra360
n4 See: Special Notice: FINRA Requests Comment on Potential Enhancements to Certain Engagement Programs. www.finra.org/industry/special-notice-032117
n5 See: Regulatory Notice 16-39 (SEC Approves Rule Change to Require Reporting of Transactions in
n6 See: http://www.finra.org/investors/highlights/finra-securities-helpline-seniors
n7 See: http://www.finra.org/sites/default/files/FINRA_Blockchain_Report.pdf
n8 See: http://www.finra.org/newsroom/2017/finra-launches-innovation-outreach-initiative
n9 See: http://www.finra.org/sites/default/files/2017-regulatory-and-examination-priorities-letter.pdf
n10 See: http://www.finra.org/newsroom/speeches/061217-protecting-investors-bad-actors
n11 See: https://brokercheck.finra.org/
n12 See: http://www.finra.org/sites/default/files/2017-regulatory-and-examination-priorities-letter.pdf
n13 See: Regulatory Notice 17-14 (FINRA Requests Comment on FINRA Rules Impacting Capital Formation). http://www.finra.org/industry/notices/17-14
n14 See: Regulatory Notice 16-37 (SEC Approves FINRA's Capital Acquisition Broker (CAB) Rules). http://www.finra.org/industry/notices/16-37
n15 See: Regulatory Notice 16-06 (SEC Approval of FINRA Funding Portal Rules and Related Forms). http://www.finra.org/industry/notices/16-06
n16 See: Regulatory Notice 13-43 (SEC Approves a Limited Exception From FINRA Rule 5131(b) to Permit Firms to Rely Upon a Written Representation From Certain Unaffiliated Private Funds). http://www.finra.org/industry/notices/13-43
n17 See: http://www.finra.org/newsroom/2014/finra-launches-retrospective-rule-review
n18 See: http://www.finra.org/newsroom/2014/finra-announces-arbitration-task-force
n19 See: https://www.finrafoundation.org/
n20 See: http://www.finra.org/investors
Read this original document at: https://financialservices.house.gov/UploadedFiles/HHRG-115-BA16-WState-RCook-20170907.pdf
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