New Enforcement Structure at FINRA; Calls for ‘Fintech’ Commentary

FINRA asks advisers to share their insights about “fintech innovation in the broker/dealer industry,” while also unveiling a new structure for its enforcement staff.

The Financial Industry Regulatory Authority (FINRA) revealed a new structure and senior leadership team for its department of enforcement.

According to FINRA, this week marks the completion of the final phase of the integration of its enforcement functions—a process that began with the July 2017 promotion of Susan Schroeder to FINRA’s head of enforcement. At that time, Schroeder was tasked with creating a more unified enforcement function. 

“This consolidation is a key outcome of FINRA360, FINRA’s ongoing comprehensive self-evaluation and improvement initiative,” according to the self-regulatory organization. “Prior to the consolidation, the department was separated into two distinct enforcement teams within the organization—one handling disciplinary actions related to trading-based matters found through the market regulation department’s surveillance and examination programs, and the other handling cases referred from other regulatory oversight divisions, including member regulation, corporate financing, the office of fraud detection and market intelligence, and advertising regulation.”

According to Schroeder, the new enforcement structure is “designed to facilitate more consistent decisions and outcomes by, among other things, supporting new centralized functions.” In her role leading enforcement, Schroeder has implemented a new process for departmentwide consultation on matters referred to enforcement, and a unified team of enforcement investigators who bring subject-matter expertise to the wide range of cases on the enforcement docket.

“The consolidation of our enforcement functions enables us to better target developing issues that can harm investors and market integrity, and ensure a uniform approach to charging and sanctions,” she adds.

Under the unified structure, the department of enforcement contains two new centralized groups designed to ensure a more consistent and foreseeable enforcement program. The first is the “office of the counsel to the head of enforcement,” described by FINRA as “a new unit that centralizes a group of experienced attorneys and staff to consult on matters referred for enforcement action, which was created to enhance the consistency and transparency of enforcement investigations and outcomes.” This unit is led by Senior Vice President Lara Thyagarajan, who joined FINRA’s enforcement department in 2006.   

The second new centralized group is dubbed “investigations,” described as “a new unit consolidating enforcement’s non-attorney investigators who have significant industry expertise and investigative experience, and work with enforcement attorneys and other groups within FINRA that conduct investigations of potential misconduct.” Terrence Bohan, who has spent the past 23 years at the New York Regional Office of the Securities and Exchange Commission (SEC), will join FINRA as vice president of investigation on August 13 to lead this new unit.

Zooming in on its staff of more than 150 attorneys, FINRA says this group “will be organized in teams to facilitate consistent decisions across the enforcement program while retaining subject-matter expertise in specialized groups.” At a high level, generalist attorneys who investigate and prosecute “all types of disciplinary matters” will be lumped into a “main enforcement” group; specialized attorneys who counsel member supervision examiners during examinations and investigations, and bring disciplinary actions concerning sales practice violations, will be lumped into a “sales practice enforcement” group; and other specialists focused on investigations arising from FINRA’s trading surveillance, and prosecuting resulting disciplinary actions, will be lumped into the “market regulation enforcement” team.

In other FINRA news: Calls for comment on brokerage technology

FINRA this week also issued a Special Notice “seeking comment on how it can support financial technology innovation consistent with its mission of investor protection and market integrity.”

To this end, the organization requests comment on “certain fintech areas,” including the “provision of data aggregation services, supervisory processes concerning the use of artificial intelligence, and the development of a taxonomy-based machine-readable rulebook.” The notice requests comment by October 12.

FINRA explains that it has enhanced resources dedicated to this rapidly developing area of the industry, having established an innovation outreach initiative last year “to foster an ongoing dialogue with the securities industry and to better understand fintech innovations and their impact on the industry.” As part of this dialogue, a number of market participants expressed a desire for FINRA to solicit broader feedback regarding the effects of any FINRA rules or administrative programs on fintech innovation. The Special Notice is intended to provide an opportunity for such feedback.

“The innovation outreach initiative has helped us better understand fintech developments across the broker/dealer [B/D] industry,” adds FINRA President and CEO Robert Cook. “As we consider taking additional steps, it is important to broaden the dialogue to hear how any FINRA rules or administrative processes could be modified to better support fintech innovation without adversely affecting investor protection or market integrity. We also hope to learn about any potential areas of innovation that would benefit from a greater focus on investor protection safeguards.”

The full Special Notice, which includes instructions for submitting comments, is available here.