FINRA Enforcement Chief’s Key Objectives

By Bill St. Louis, Executive Vice President and Head of FINRA Enforcement

FINRA Enforcement works on the front lines of investor protection. This blog post discusses some of the key objectives that drive this critical work.

First, some brief background about FINRA and the role Enforcement plays as part of a multi-faceted regulatory program.

FINRA helps ensure that everyone can participate in the securities markets with confidence through vigorous, fair and effective oversight of our member firms’ compliance with FINRA and Municipal Securities Rulemaking Board rules, and federal securities laws and rules. We conduct this oversight in many ways, including by writing and revising rules, examining member firms, surveilling markets and investigating potential misconduct.

And, when we do identify misconduct, we act quickly to impose appropriate disciplinary action, including restitution for harmed investors and removing bad actors from FINRA membership. Meaningful enforcement actions correct wrongdoing, deter future misconduct and root out the bad actors that pose the greatest risk of harm to investors and the markets.

My key objectives for Enforcement include:

• protecting investors and markets,
• enhancing the transparency of FINRA Enforcement to external stakeholders,
• increasing our efficiency and reducing the time to complete cases, and
• improving collaboration across FINRA’s regulatory operations.

These objectives help protect investors, safeguard the integrity of the market and enable us to better fulfill our regulatory mandate.

Protecting investors and markets

We bring many important enforcement actions. How we prioritize our work is critically important, and we focus our finite resources on those actions that are most impactful for investors and markets, particularly cases that involve senior and vulnerable adults, customer harm, recidivist behavior and firms and brokers with a history of misconduct.

• Senior and vulnerable investors: We strive to reduce the amount of fraud and misconduct aimed at seniors and vulnerable adults and take decisive action against perpetrators who exploit these investors. Enforcement continues to be instrumental in FINRA’s long-standing efforts to protect seniors and vulnerable adults.
• Customer harm and restitution: Cases that involve direct harm to customers are among the most impactful actions we can bring, with very real consequences for those investors affected. When possible, our department requires firms or brokers to pay restitution to investors who they have harmed. As one example, last year, four firms were required to pay over $1 million in restitution for violations relating to fully paid securities lending.
• Recidivist behavior: Combatting the efforts of bad actors who have a history of misconduct and repeat violations is also a major priority for our department. Plain and clear, sanctions imposed on recidivists should be more severe because a recidivist has already failed to comply with FINRA’s rules or securities laws.
• Firms and brokers with a history of misconduct: FINRA confronts firms and brokers with a history of misconduct to prevent them from harming investors and compromising the integrity of the financial markets. Where appropriate, we seek to bar brokers who have engaged in egregious misconduct from associating with FINRA member firms.

Beyond the areas listed above, we also place an emphasis on other cases:

• Regulation Best Interest: The SEC’s Regulation Best Interest (Reg BI) rule establishes a “best interest” standard of conduct for broker-dealers and associated persons when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities, including recommendations of types of accounts. Our department’s Reg BI-related disciplinary actions have been increasing, with the expulsion of two firms for misconduct that included Reg BI violations. We have brought cases involving the Customer Relationship Summary form (Form CRS), excessive trading, complex products and variable annuities, with more in the pipeline. On our website, FINRA maintains a helpful chart listing disciplinary actions that include a Reg BI or Form CRS violation.
• Best Execution: FINRA’s Rule 5310 (Best Execution and Interpositioning) requires that in any transaction for or with a customer or a customer of another broker-dealer, a member firm and associated persons with a member firm should use reasonable diligence to ascertain the best market for the subject security and buy or sell in such market so the resultant price to the customer is as favorable as possible under prevailing market conditions. Our department has pursued cases focused on routing practices and execution quality, such as when firms route to their own alternative trading system, and firms receiving payment for order flow and not conducting reasonable regular and rigorous reviews of execution quality.
• Targeted examinations: There are a number of targeted examinations (also known as sweeps) being conducted by our regulatory operations colleagues. As those sweeps progress, they may be referred to Enforcement, and we want to prioritize those related cases to ensure they are concluded in a timely manner. For instance, we recently brought the first settlement in a case that resulted from the sweep on social media influencers and customer acquisition. This is of specific importance since so much of the public receives investing advice from social media.
• Consolidated Audit Trail: The overwhelming majority of firms have successfully complied with their Consolidated Audit Trail (CAT) reporting obligations. Where firms have experienced CAT reporting issues, those matters are typically resolved with no further action or Cautionary Action. However, there are still some CAT cases in our pipeline, including instances of millions if not billions of late or inaccurately reported order events, situations where firms are aware of CAT problems and do not reasonably respond to red flags, failure to implement a reasonable CAT system for several years, or when firms limit their supervisory reviews to data fields rejected by CAT.

Enhancing the transparency of FINRA Enforcement to external stakeholders

A core part of any healthy regulatory program is transparency. And for our department, transparency is a value we hold in the highest regard. This is why we are considering ways to provide visibility into the Enforcement process, help firms and their associated persons (including individuals who may appear pro se in FINRA’s disciplinary’s process) gain a better understanding of how the investigative process works as well as the procedural safeguards in the process.

Increasing our efficiency and reducing the time to complete cases

Our department regularly seeks and receives feedback from member firms and outside counsel to gain a better understanding of their perspectives on FINRA’s Enforcement process. The time it takes to conclude a case often is mentioned in those ongoing conversations. Delays in the completion of cases can stem from the increasingly complex nature of our cases, new rule sets which we necessarily want to get right, production delays when firms fail to timely produce documents or materials we have requested and internal staff turnover. Reducing the time to complete cases is top of mind for our department as we look for ways to become more efficient.

For example, we are seeking to have more frequent touchpoints with potential respondents. And we are exploring ways to create more specialization and better leverage subject matter experts in our department to more efficiently handle certain types of matters.

Improving collaboration across FINRA’s regulatory operations

Continuously strengthening the alignment of our regulatory operations ensures improved effectiveness and efficiency in our exams, investigations, surveillance, disciplinary actions and other regulatory activities. That has been a key focus of Enforcement and our partners over the last few years, and it has shown real results. By focusing on how the regulatory operations functions work with each other, and how we communicate and share information, we have already enhanced the quality and efficiency of FINRA’s work in service of our mission. And we have much more that can come from this continued collaboration.

Conclusion

Advancing these objectives requires hard work by the talented team of professional investigators, analysts, data analysts, attorneys and operations staff at FINRA Enforcement. We are confident that by diligently pursuing the objectives and keeping our mission of investor protection and market integrity top of mind, we can achieve our goals and collectively do what is right for investors and the market.