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Regulation and Compliance > Federal Regulation > FINRA

4 Regtech Challenges for BDs to Watch For: FINRA

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While the use of regtech offers potential benefits to aid broker-dealers’ compliance efforts, regulatory challenges may also accompany adoption of such tools, according to a just-released white paper from the Financial Industry Regulatory Authority.

FINRA’s paper summarizes key findings from FINRA staff discussions with more than 40 participants in the regtech space, including broker-dealers, vendors, regtech associations, academics and other key players.

The paper provides a rundown of how regtech tools are being applied in five areas: Surveillance and monitoring; customer identification and anti-money laundering (AML) compliance; regulatory intelligence; reporting and risk management; and investor risk assessment.

Also noted are “key benefits and potential regulatory and implementation implications” for broker-dealers to consider as they explore and adopt regtech tools.

A recent FINRA podcast also noted the emergence of suptech, or supervisory technology, which Haime Workie of FINRA’s Office of Emerging Regulatory Issues noted is a “new buzzword” that refers to “technology that’s used by regulators in the process of supervision, and potentially could be used to refer to firms themselves that use it as a supervisory type of function.”

Suptech is “really the use of technology to assist with supervision of rules and making sure there is compliance with those rules,” Workie said.

As FINRA’s report points out, regtech refer to “new and innovative technologies designed to facilitate market participants’ ability to meet their regulatory compliance obligations.”

The Institute of International Finance defines regtech as “the use of new technologies to solve regulatory and compliance burdens more effectively and efficiently.”

The broker-dealer self-regulator also notes that the “emergence and mainstream adoption of innovative technologies in recent years has also played a role in the rise of regtech.”

Compliance functions “now have the potential to be streamlined using a variety of technologies, such as artificial intelligence (AI), natural language processing, big data and advanced analytics, cloud-based computing, robotics process automation, distributed ledger technology, application program interfaces (APIs) and biometrics,” the report states.

“These technologies present great opportunities for firms to develop and use applications that may enhance existing compliance at reduced costs.”

Broker-dealers, the paper states, should pay particular attention to the following potential regulatory challenges when adopting regtech:

1. Supervisory Control Systems: FINRA rules require firms to maintain reasonable supervisory policies and procedures related to supervisory control systems in accordance with applicable rules, including having reasonable procedures and control systems in place for supervision and governance of regtech tools, including supervision of AI-based tools and systems. Some of the regtech applications may use “highly complex and sophisticated AI algorithms.” Compliance and business professionals “may not have the technical skills to understand in detail how these algorithms function.”

2. Outsourcing Structure and Vendor Management: Broker-dealers are choosing to outsource discrete compliance and reporting functions (e.g., customer identification, AML transaction monitoring, fraud surveillance, etc.) to regtech vendors. However, “outsourcing an activity or function to a third-party does not relieve” broker-dealers of their ultimate responsibility for compliance with all applicable securities laws, regulations and FINRA rules associated with the outsourced activity or function.

3. Customer Data Privacy: Emerging regtech tools and services involve the collection, analysis and sharing of customer-related information. Broker-dealers should consider the application of customer data privacy rules when exploring regtech applications.

4. Talent and Training: Firms should consider whether they have the appropriate staff, functions and training for processes that may change with the adoption of regtech tools.


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