Chairman Neugebauer, Ranking Member Capuano and Members of the Subcommittee:
I am Richard Ketchum, Chairman and CEO of the Financial Industry Regulatory Authority, or FINRA. On behalf of FINRA, I would like to thank you for the opportunity to testify today.
Unfortunately, we are here today because of a massive fraud that has had tragic results for many investors. No regulator can feel good about its performance regarding Stanford. Notwithstanding the jurisdictional limits that confronted us, FINRA clearly could have done better and we deeply regret we did not. In the wake of Stanford, FINRA stepped back and took a hard look at our regulatory programs and approaches, and searched for ways to more effectively uncover misconduct, especially fraud, and enhance our programs to better protect investors.
In early 2009 the FINRA Board of Governors established a Special Review Committee to conduct a review of FINRA's examination program as it related to the detection of fraud and Ponzi schemes, including the one R. Allen Stanford is charged with perpetrating. The Special Review Committee, chaired by former U.S. Comptroller General Charles A. Bowsher, concluded its review in September 2009 and presented its full findings to Congress, the Securities and Exchange Commission (SEC) and the public. We are grateful to Chairman Bowsher and the other distinguished members of the Special Review Committee for the time and effort they dedicated to helping us identify areas where our regulatory programs could be enhanced.
The report made a number of important recommendations to FINRA staff focused on improving our regulatory procedures. First, the report identified a number of internal reforms designed to better safeguard investors and the broader financial system. Second, the report called attention to the many regulatory challenges related to jurisdictional issues and product definitions. Finally, the review pointed to the urgent need for reforms that ensure comprehensive oversight, reduce jurisdictional confusion, streamline enforcement and improve coordination and communication among all regulators.
FINRA staff moved swiftly to implement the recommendations in the report. FINRA has either fully implemented or is implementing all the recommendations that did not require action by the SEC or Congress.
First and foremost, we centralized fraud detection in a single unit, while focusing our examination program on finding fraud. FINRA created the Office of the Whistleblower in early 2009 and, later that year, built upon that model by establishing the Office of Fraud Detection and Market Intelligence (OFDMI). This office provides a heightened review of incoming allegations of serious frauds, functions as a centralized point of contact internally and externally on fraud issues and consolidates recognized expertise in expedited fraud detection and investigation. We have also enhanced our examination programs and procedures to improve our ability to identify conduct indicative of fraud and conducted training programs for examiners aimed at fraud detection. I will provide more detail on these efforts later in my testimony.
Each of the initiatives undertaken by FINRA contributes to our broader mission to protect investors by making sure the securities industry operates fairly and honestly, both in its dealings with individuals and through the operation of the systems and technologies that underpin today's markets.