FINRA levied millions of dollars in fines last year - so what did it do with the money?

(An earlier version of this article appeared in Compliance Matters, sister news service to this one.)

The US Financial Industry Regulatory Authority levied $61.0 million in fines in 2018, spending it on capital initiatives, strategic expenditures and other activities.

FINRA’s use of such monies is governed by its so-called financial guiding principles which it first published in January last year. It may only use the money for one of four enumerated purposes:

-- capital initiatives or non-recurring strategic expenditures that help it oversee things more efficiently and effectively (perhaps by using IT and data) or that help the firms it regulates to comply more closely with its wishes;

-- activities to educate investors and FINRA's own employees;

-- capital initiatives required by new legal, regulatory or audit requirements; or

-- the  replenishment of reserves if they run dangerously low.

In 2018 FINRA spent 23.44 per cent of the money on education and 76.56 per cent on capital initiatives and strategic expenditures, i.e. on the first two items; the other two received nothing.

Capital initiatives and strategic expenditures
FINRA spent some of the money on 'migrating' various IT applications from data centers that it manages to cloud-based platforms. It has used cloud-based infrastructure more and more since 2013 and the process of 'migration' goes on. The object of the exercise is "to reduce the long-term costs of maintaining our own data centers and improve our ability to add data processing and storage capacity as necessary."

Last year FINRA embarked on a multi-phased effort to overhaul its registration and disclosure programs, a project that it expects to complete in 2021. Last year it spent some of the money on changing old registration systems into ones that use 'open source' architecture and cloud-based infrastructure. It also launched its Securities Industry Essentials exam for representatives. Dispute resolution systems and corporate websites also received some cash.

Big Brother
FINRA has developed a comprehensive regulatory audit trail to monitor the integrity of the markets. Its systems processed on average 66.7 billion equity, options and fixed-income-market events per day in 2018 and generated billions of additional derived market events by standardizing trading activity across the markets.

With the audit trail working well, FINRA looked at 99 per cent of all trading in US-listed equities markets and 50 per cent of all trading in US-listed options. FINRA is also responsible for the surveillance of the unlisted equity market and fixed income instruments that trade in the over-the-counter market, and conducts examinations and investigations to identify potential market manipulation or other misconduct.

Money from fines went into all this.
FINRA also invested some of the money to improve the sophisticated computer programs or 'patterns' that it uses to detect a wide variety of compliance problems and suspicious conduct in the markets, and to improve the ways in which it reviews its findings.

Documentary expenditures
It invested a small amount in improvements to the platform which it uses to manage market regulation cases from start to finish. It also invested in improvements to certain document-review systems on its external-facing digital platform. These included the Advertising Regulation Electronic Files (AREF) System, through which firms submit their communications to the public.