The report follows an in-depth review conducted by FINRA on the emergence of RegTech tools within the securities industry and summarizes the study’s key findings. Notably, FINRA highlights five areas where industry participants have most prominently leveraged RegTech innovations: surveillance and monitoring, customer identification and antimoney laundering compliance, regulatory intelligence, reporting and risk management and investor risk assessment.

The paper goes on to identify key benefits and risks including potential regulatory and implementation implications for broker-dealer firms to consider as they explore and adopt RegTech tools. Potential benefits that RegTech innovations may offer include better risk management and improved efficiency through automation. FINRA also outlines a number of possible regulatory and implementation issues for broker-dealers to consider as they explore RegTech services, including supervisory control systems, outsourcing structure and vendor management, customer data privacy, security risks and others.

FINRA has requested comments and feedback from interested parties by November 30, 2018.

“Regulatory technology is playing an ever-increasing role for broker dealers and regulators must ensure they are keeping pace with industry innovations,” said Haimera Workie, Senior Director, Office of Emerging Regulatory Issues. “FINRA’s report provides an initial contribution to our ongoing conversation with market participants about how RegTech tools can help enhance compliance efforts in order to keep markets fair and investors safe.”

Through FINRA360 - FINRA’s comprehensive organizational self-review - the not-for-profit regulator has dedicated more resources to better understand the impact of technological innovations on markets and innovating in parallel to fulfill its regulatory role. FINRA established an Innovation Outreach Initiative last year to create a dialogue about financial technology with the securities industry and other stakeholders. Since then, FINRA has taken numerous steps to achieve that goal, including the release of today’s white paper.

About the Innovation Outreach Initiative

To foster an ongoing dialogue with the securities industry and to better understand fintech innovations, FINRA established an Innovation Outreach Initiative in June 2017. FINRA created a cross-departmental team that is responsible for carrying out the initiative and working closely with industry participants to gain real-time intelligence on fintech issues. The team is tasked with creating and managing a Fintech Industry Committee to facilitate a continuous discussion on fintech developments and how FINRA's rules and programs interact with technology innovations. The team is also responsible for conducting events and forums for market participants (including FINRA members and non-members) to share thoughts, ideas, and concerns regarding fintech topics; developing internal training programs on fintech topics for FINRA staff; enhancing collaboration with other regulators (both domestically and internationally); and developing timely publications on fintech topics.

The Innovation Outreach Initiative enables FINRA to better track fintech developments across the rapidly changing industry environment in order to support innovation in the industry while maintaining investor protection and market integrity.

The Innovation Outreach Initiative has already resulted in a number of positive changes, including:

FINRA formed a Fintech Industry Committee composed of both large and small member firms, non-member firms offering fintech-related services, as well as committee observers from the SEC and the North American Securities Administrators Association (NASAA), to provide a platform for ongoing dialogue and analysis of fintech developments.
FINRA held a blockchain symposium in July 2017, a San Francisco fintech regional roundtable in September 2017, a Dallas fintech regional roundtable in November 2017 and a New York City fintech regional roundtable in April 2018.
FINRA has also issued Fintech-related Investor Alerts:
Know Before You Share: Be Mindful of Data Aggregation Risks;
Don’t Fall for Cryptocurrency-Related Stock Scams; and
Initial Coin Offerings: Know Before You Invest.
In response to feedback we received through our discussions with market participants since the start of Innovation Outreach Initiative, FINRA released a Special Notice on Innovation in July 2018. The notice requests comments and feedback regarding how it can support financial technology innovation consistent with its role as a guardian of market integrity.
FINRA held FinTech Office Hours at the FINRA Annual Conference, providing a forum for members to meet with and discuss fintech-related topics with FINRA staff.
Launched a dedicated webpage to house various fintech-related materials at www.finra.org/fintech.