A review of the Financial Industry Regulatory Authority, Inc. finds that it needs to ramp up its oversight and fraud detection capabilities.

Following the revelation of two major Ponzi schemes in the U.S. that went undetected by regulators, FINRA established a special review committee to scrutinize its examination program. On Friday, the report from the committee was released, recommending a variety of changes.

The most important of these recommendations urge the regulator to:

• clarify and expand its jurisdiction to enable it to be more effective in detecting fraud and protecting investors;
• restructure its examination program to make fraud detection a core element;
• improve the technology available to its examination staff;
• end its near-total reliance on data provided by member firms.

Virtually all of the recommendations will require FINRA management and its board to make key decisions on resource allocations, the report said, although some of the recommendations will also require action by the Securities and Exchange Commission or Congress. FINRA management has agreed to present a plan of action for approval at its December board meeting.

“As regulators, we owe it to investors — especially those harmed by recent scandals — to develop a better, more comprehensive response to fraud, and I am committed to taking the lessons from the report’s findings to make FINRA even stronger,” said FINRA chairman and CEO, Richard Ketchum, in response to the report.

“As the findings have concluded, a number of key points are apparent. First, FINRA must institute a number of internal reforms to better safeguard investors and the broader financial system. Second, the report calls attention to the many regulatory challenges related to jurisdictional issues and product definitions. Finally, the review points to the urgent need for financial regulatory reform that ensures comprehensive oversight, reduces jurisdictional confusion, streamlines enforcement and improves coordination and communication among all regulators,” he added.

“FINRA has already taken many steps to improve its examination and fraud detection capabilities since these scandals happened,” Ketchum said, adding that it is creating a new Office of Fraud Detection and Market Intelligence to provide rapid response to fraud by a staff with expertise in fraud detection and investigation.

IE