[ by Melanie Gretchen ] FINRA commemorated its 5-year anniversary since its 2007 inception, formed by the consolidation of NASD and NYSE-Regulation units, including Member Regulation, Enforcement, and Arbitration.  On this occasion, FINRA took the opportunity to consider the key strategic initiatives taken and significant operational changes made over the 5-year period. FINRA Chairman and CEO Rick Ketchum described the agency's evolution, as follows:

"This has been a challenging time for investors and the markets, and FINRA has responded by making critical changes across the organization. We formed a single streamlined exam program that is more efficient and effective than it was five years ago.

By focusing more of our efforts on areas posing the greatest risk to investors, we have been able to create a culture in the organization to more quickly identify and respond to fraud and other serious misconduct. Given the pace of change in the marketplace, our regulatory programs will continue to adapt as needed to deal with new products, risks and schemes."

Countering Fraud. Following the financial crisis and the Madoff and Stanford Ponzi scandals, FINRA worked on making its regulatory programs more effective in identifying and fighting fraud.  Recent additions include: (i) The Office of the Whistleblower in 2009;  and, (ii) The Office of Fraud Detection and Market Intelligence (OFDMI), also in 2009.

More About OFDMI. Probably few compliance and legal professionals are familiar with this Office, which was formed to focus resources on the detection and investigation of suspected fraud, insider trading, microcap fraud, and Ponzi schemes, and to work to coordinate regulatory intelligence across the FINRA enterprise. In that regard, OFDMI reviews incoming allegations of serious fraud, and serves as a centralized point of contact internally and externally on fraud issues.  It also provides assistance to federal and state regulators to identify numerous regulatory cases, including many high-profile cases involving insider trading, Ponzi schemes, and microcap fraud. Since inception in 2009, OFDMI has, among other things, referred more than 1,750 matters to the SEC and other federal or state law enforcement agencies.  It also has referred to those same regulatory agencies:  (i) more than 775 matters involving boiler rooms and microcap fraud;  and, (ii) more than 820 insider trading matters.

Enhanced Exam Program. FINRA refined its exam program to better detect potential fraud and focus on areas of greatest risk, conducting on-site examinations of firms, supplemented with a newly developed surveillance program that continuously monitors firms off-site.  These improvements have enabled FINRA to:

• Reshape its ability to capture and leverage more granular operational and risk data, helping FINRA staffers to better understand each firm's business model and the embedded risk of such a model.
• Provide FINRA staff with greater focus at the point of sale - leading to more branch exams and more time spent at branch locations.
• Increase the number of staffers in district offices to have an in-depth and ongoing understanding of specific firms, while increasing real-time monitoring of business and financial changes.

Market Regulation. In 2010, FINRA finished the 2nd stage of regulatory consolidation with the NYSE by reaching an agreement with NYSE Euronext to assume responsibility for performing market surveillance and enforcement for NYSE Euronext's U.S. equities and options markets - the NYSE, NYSE Arca, NYSE Amex.  At that time, FINRA was already providing regulatory services to the Nasdaq Stock Market, Nasdaq Options Market, Nasdaq OMX Philadelphia, Nasdaq OMX Boston, The BATS Exchange, and The ISE (International Securities Exchange). This coverage provides FINRA with the ability to view view aggregated trade data across 80% of the U.S. securities markets that, in turn, enables FINRA to conduct comprehensive cross-market surveillance activities that has improved the ability of FINRA staffers to better capture and analyze data and detect problematic trading activity across multiple markets and financial products. Developing OATS. FINRA has expanded the Order Audit Trail System (OATS) to include all National Market System (NMS) securities.  This now serves as a foundation for the cross-market surveillance program - an important factor that will allow FINRA to play an important role in the development and adoption of a consolidated audit trail -  through the development of an NMS plan. Addressing Market Volatility. After the Flash Crash of 5/6/10, FINRA teamed up with the SEC and exchanges to develop and implement measures designed to address extraordinary market volatility issues.  From this collaboration came the implementation of single-stock circuit breakers and erroneous pilots, both of which are currently in effect. FINRA and the exchanges also have proposed new standards for market-wide circuit breakers and a new limit up-limit down framework to replace the existing single-stock circuit breakers.  This year, the SEC approved one-year pilot programs for these 2 areas that begin next February. Improving Market Transparency. Among several improvements, are FINRA's BrokerCheck and the expansion of TRACE. New BrokerCheck features include:  (i) records of all final regulatory actions against brokers are now permanently available to the public, for both active brokers and inactive brokers (i.e., no longer employed in the industry);  and, (ii) a new zip code search and centralized access to information about securities and investment advisory firms and their registered employees.

FINRA expanded the Trade Reporting and Compliance Engine (TRACE) in March 2010 to include agency debentures and new issue transactions.  In May 2011, TRACE was further expanded to include reporting of transactions in ABS and MBS for regulatory purposes.  In July 2012, the SEC approved a FINRA proposal to publicly disseminate so-called TBA transactions, and FINRA continues to assess additional dissemination as appropriate. Expanded TRACE coverage has the following benefits: (i) trades in 1.4 million eligible securities are covered, up from 37,000 in 2007;  and, (ii) lower transaction costs result in an estimated $1 billion per year in savings for investors, while mark-to-market valuation has improved.

Disciplinary Actions. Since July 2007, FINRA has brought 6,291 disciplinary actions and levied fines of $254.1 million.  FINRA also has ordered $54 million in restitution to harmed investors., expelled 99 firms, barred 1,647 individuals, and suspended 1,992 from association with FINRA-regulated firms.

Dispute Resolution. Beginning in 2011, investors were given the option of choosing all-public panels in all customer cases requiring a panel of 3 arbitrators. Investors also have been provided with the option of selecting their arbitrators when they file claims. Furthermore, in 2009, FINRA introduced a rule limiting motions to dismiss in arbitration, thus ensuring that claimants have a full opportunity to argue their case.  Under the new rule, a motion to dismiss before a claimant's case is presented can only be granted on 3 specific grounds, and there are stringent new sanctions against parties for engaging in abusive case-dismissal practices. Investor Education Foundation. FINRA Investor Education has issued investor alerts warning investors about an array of complex investment products, troubling trends, and outright scams. The FINRA Investor Education Foundation has implemented innovative grant-making partnerships with the American Library Association and United Way Worldwide to bring community-based financial education resources to underserved urban, suburban, and rural areas across the country. Investor Protection Campaign. The FINRA Foundation launched a research-based Investor Protection Campaign to help investors spot and avoid investment fraud.  Tricks of the Trade: Outsmarting Investment Fraud, a documentary that is a centerpiece of this campaign, has aired more than 750 times on 170 public television stations in 75 markets across 30 states. National Financial Capability Study. In 2009, in consultation with the U.S. Department of the Treasury and the President's Advisory Council on Financial Literacy, FINRA Foundation fielded America's first National Financial Capability Study comprising 3 linked surveys.  The largest of these, the State-by-State Financial Capability Survey, allows the public, policymakers and researchers to delve into and compare the financial capabilities of Americans in every state and across geographic regions. In the coming months, a 2nd wave will cover the military and state-by-state components of the National Financial Capability Study. Military Financial Education Project. The FINRA Foundation's Military Financial Education Project continued to provide military families with the knowledge and tools they need to overcome financial challenges. For further details, go to:  [FINRA News Release, 7/30/12].