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FINRA Outlines Perspective on RegTech

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RegTech innovation is commendable, but must be accompanied by risk mitigation, seen as a means to an end rather than an end in itself, and selected for use by a cross-section of an organisation that is inclusive of, but not limited to, IT and compliance.

Opening A-Team Group’s RegTech Summit New York with a keynote fireside chat with David Ehrich, executive director of the Alliance for Innovative Regulation (AIR), Haimera Workie, vice president and head of financial innovation at the Financial Industry Regulatory Authority (FINRA), outlined the authority’s perspective on RegTech. He also reviewed two new areas of focus – Blockchain Lab and a machine-readable rulebook initiative.

Ehrich noted FINRA’s history as a leader in technology adoption, and suggested RegTech is coming into its own as regulators lean in to improve their own regulatory processes, before handing over to Workie to talk about RegTech adoption. He said: “Technology needs to be exciting and bring in new things, but firms must be clear about associated risk and how to mitigate that risk. Our office identifies the possibilities of technology, but also accounts for risk.”

In response to a more specific RegTech question from Ehrich about whether artificial intelligence (AI) is harmful or helpful, Workie commented: “AI has similarities to other types of technology such as natural language processing (NLP) and machine learning (ML), but is unique in its risks around explainability. Again, as regulators, we think about how firms are using AI and its explainability.”

Touching on the challenges and opportunities faced by financial institutions when
considering new technologies, and how to pose their use to regulators, he said: “Contact us, talk to us, think about the actual benefits of new technology from an operational standpoint and for investors. Regulators want to work with industry to find solutions.”

RegTech initiatives

FINRA has pondered the potential of digital assets and blockchain for some years and recently introduced Blockchain Lab, a development centre for RegTech tools that can be used to supervise digital securities and shared with market participants. The authority is one of few regulators already involved in digital assets, but won’t be the last. “We hear real desire for regulators to get hands-on experience to understand and gain expertise on the technologies being used,” Workie said.

FINRA’s latest initiative is a machine-readable rulebook designed to enhance firms’ compliance efforts, reduce costs and aid in risk management. The rulebook is based on an embedded taxonomy that tags the 40 most frequently viewed FINRA rules. A FINRA Rulebook Search Tool (FIRST) allows users to identify potentially relevant rules and associated requirements using the taxonomy terms. FIRST can be accessed through a user interface on the FINRA website, while the taxonomy terms that have been tagged to the rules are available through an API.

Ensuring ongoing RegTech innovation and adoption alongside risk mitigation, Workie noted FINRA’s annual Examination and Risk Monitoring Program report that, for each topical area covered, identifies relevant rules, highlights key considerations for member firms’ compliance programmes, summarises noteworthy findings from recent examinations, outlines effective practices that FINRA observed during its oversight, and provides additional resources that may be helpful to member firms in reviewing supervisory procedures and controls, and fulfilling compliance obligations.

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