Remarks From the 2017 FINRA Annual Conference

Robert W. Cook

President and CEO, FINRA

FINRA Annual Conference
Washington, DC

May 17, 2017

A Changing Industry – A Changing FINRA

Good morning, and thank you Chip [Jones, FINRA’s Head of Member Relations and Education]. We all owe a debt of gratitude to Chip and his fantastic team for once again organizing an excellent conference, including more than 50 expert panel discussions that will help us better protect and serve investors.

I look forward to the honor of welcoming our keynote speaker, Senator Mike Crapo, Chairman of the Senate Banking Committee, at today’s luncheon. We are grateful that Chairman Crapo is able to be with us during such a busy time in Washington to share his perspectives on the 115th Congress and his agenda for the Banking Committee.

I also want to thank the Chairman of FINRA’s Board of Governors, Jack Brennan, Chairman Emeritus and Senior Advisor to the Vanguard Group, for joining us yesterday to share his views on the industry, FINRA, and self-regulation.

It is exciting and encouraging to see so many people here. We have close to 1,500 attending in person and hundreds more watching online. In addition to affirming the value of this annual event for our members, your participation reflects the shared interest we have in maintaining high standards of conduct in the securities industry. The vitality of the U.S. capital markets depends on the trust investors place in it—and that trust in turn depends on your hard work every day to ensure compliance with rules designed to protect investors and keep markets fair.

Most of this conference’s agenda is focused on the vital task of connecting you with the resources, perspectives, and answers you need to take on the challenges presented by the many changes occurring in the securities industry—changes in regulation, in technology, in products and investment strategies, in customer needs and preferences, in business models and in the competitive landscape. For the purpose of my time with you today, however, I would like to switch from talking about how the securities industry is evolving to talking about a different but closely related topic—how FINRA is changing.

An Opportunity to Build an Even Better FINRA

For several reasons, now is an opportune time for FINRA to review how our operations are—or are not—meeting the current challenges facing the organization, and to make any changes required. First, it is entirely natural that as a new CEO coming in from outside the organization, and with the benefit of fresh eyes, I want to work with senior management to look at how things are done and identify ways to do them better. At the same time, this summer also marks an important milestone in FINRA’s history—it will be ten years since FINRA was created from the merger of the NASD and the regulatory arm of the NYSE. During the last decade, FINRA successfully completed that complicated merger and subsequently made many substantial enhancements to its operations to adapt to changes in its membership and the markets. But amidst all that important work, FINRA has not had occasion to conduct a comprehensive, organization-wide self-assessment and improvement initiative. Engaging in such an exercise now is a fitting way to mark our tenth anniversary.

In addition, as most of you know by now, since I arrived at FINRA I have been meeting with many member firms, investors, and others from inside and outside the brokerage industry—including a continuing series of small member roundtables around the country. This “listening tour” has generated a great deal of useful feedback regarding what FINRA is doing well and what it can be doing better.

I have very much enjoyed these meetings, and I intend to keep doing them. It has been inspiring to hear so many express such strong interests in helping FINRA be a successful self-regulatory organization. But the feedback—particularly the many potential opportunities for improvement that have been identified—also has underscored the timeliness of stepping back and engaging in a top-to-bottom review of FINRA.

The input that we have received from inside and outside FINRA over the last few months has touched on a wide range of issues. Taken as a whole, it suggests that we should ask ourselves three key questions:

  • First, regarding FINRA’s policies and programs—is FINRA focusing on the right issues, establishing the right standards, and dedicating resources to the right areas to best protect investors and market integrity while promoting healthy and vibrant capital markets?
  • Second, regarding our organization and operation—is FINRA optimally organized and managed to be the most effective and efficient self-regulatory organization that it can be?
  • And third, with respect to FINRA’s engagement with our members, with investors, and with other stakeholders—is FINRA facilitating a constructive dialogue with all of these parties to understand their perspectives and develop an effective regulatory framework that is fully informed by the expertise and practical knowledge of its stakeholders?

So, with a new CEO, a tenth year anniversary, and continuing feedback from the listening tour, we have determined that now is the appropriate time to take a hard look at ourselves, ask questions like these, and take the steps necessary to ensure that FINRA is well-positioned to achieve our mission today, for the next ten years, and beyond.

FINRA360

To achieve this objective, we have initiated a program called FINRA360—the title a reference to a top-to-bottom review, taking into account views from inside and outside the organization. This effort will be a multi-year exercise focused on creating an organization that is committed to a culture of continuous improvement. The U.S. securities industry will never stop evolving, and neither can we. FINRA360 provides a framework for processing the internal and external feedback we continue to receive, engaging in a thoughtful analysis to determine whether there are opportunities for improvement, and making changes that will produce a more effective, more efficient FINRA.

We have formed a Project Management Office to help map out and implement key elements of this project. Outside the scope of this office, other projects and initiatives related to FINRA360 are already being launched across the organization. All work associated with FINRA360 is supervised by senior management and will be periodically reviewed by FINRA’s Board of Governors, which fully supports this initiative. And, as the effort ramps up, we are identifying ways for all of our employees to be engaged in this process—I fully expect that many of the best ideas will come from the front lines.

The topics being addressed under FINRA360 include:

  • The organization and operation of FINRA’s regulatory functions, including whether they are optimal for sharing information and establishing consistent standards across FINRA;
  • The use of data and technology throughout FINRA, including how they can best support efficient operations, decision-making, and policy-making; and
  • The tools and metrics used to assess outcomes and success across FINRA’s various regulatory programs and support functions.

It may help to give you a more concrete example of this work. As you may know, we have an enforcement program in our member regulation group and another one in our market regulation group. On the listening tour, I heard that stakeholders can experience these units as two different regulators, and internal feedback also identified this structure as a potential area for improvement. So we have been looking at whether these operations should be more coordinated or whether they should be combined, and at the pros and cons of each approach.

As we embark on FINRA360, there are several broad principles that I am using to guide our work.

First and foremost, we must remain focused on how to best fulfill our core mission – promoting investor protection and market integrity while facilitating vibrant capital markets. Potential changes must be evaluated based on the extent to which they will advance this mission.

Second, our thinking should consistently reflect our identity as a self-regulatory organization, empowered by federal law but separate from the government. FINRA stands at a unique intersection of regulation and industry: our mission is investor protection and market integrity, and our task is to work with our members and other stakeholders to cultivate and deploy a deep expertise in the securities industry and enable regulation that is more effective—and more efficient—than would be possible if the government acted alone. We must continue to be mindful of the potential benefits of self-regulation and consider how best to deliver those benefits. And we must be aware of the limitations of self-regulation and how they can affect our work as well. There is not sufficient time to address this topic fully today, but understanding and leveraging our SRO status to help us better fulfill our mission is an important part of our work on FINRA360.

Third, a final principle is that everything must be on the table. We must avoid incrementalism or convenient compromises when bold action is required. While our changes must have a clear purpose and be workable in implementation, we cannot shy away from ambitious initiatives that will help us better achieve our mission.

In implementing FINRA360, we are encouraging collaboration, transparency, and accountability throughout the organization—we are one team, and all of us are responsible for FINRA’s success. And we are fostering innovation, efficiency, and agility in our operations and among our employees. These are the organizational values that are driving the FINRA360 initiative, and they are essential—particularly during a time of change—for bringing us together as one FINRA, without any silos or gaps that can compromise our mission.

FINRA360, like all of our work, requires us to be good stewards of our resources. That includes striving to identify opportunities to be more efficient, such as by leveraging technology and finding other ways to do more with less. But it also means being prepared to put more resources into our people or technology where it is necessary to fulfill our mission. Investors, the markets, and our members rely on FINRA every day, and we must be in a strong financial position so that they can continue to do so in years to come.

FINRA360 will take time—a comprehensive and thoughtful review requires no less. But we are not going to wait until every work stream is complete before we begin to implement any changes. As we go forward and continue to gather input, we are identifying and making those improvements that can be accomplished more quickly.

With the remainder of my time today, I would like to highlight some recent changes and initiatives that we have been working on. While I expect even more significant changes in the months ahead, I hope that these examples will give you a sense for what we are trying to achieve with FINRA360.

Continuous Improvement in our Regulatory Operations

Let me begin with some recent changes to our regulatory operations. Starting at the top, our Board recently established on a pilot basis a Regulatory Operations Oversight Committee to provide more opportunities for the Board and staff to engage on FINRA’s regulatory operations, including examinations and enforcement. This Committee will provide invaluable perspectives and guidance as we work to enhance these programs through FINRA360.

We are also making changes to improve the day-to-day operations of our programs. The implementation of the risk based examination program that was started a few years ago continues to advance, with all of our examiners and firm coordinators now operating on a unified risk monitoring platform. More recently, just last month, we also committed to substantially increase our spending over the next two years to transform the way we bring new examiners on board and to enhance how we train examiners and coordinators. In addition, we are advancing a series of more incremental improvements to these programs, such as implementing an organization-wide policy that encourages the use of video conferencing for on-the-record interviews, which should reduce costs for both FINRA and firms.

With respect to enforcement, dialogue with our stakeholders over the last several months has highlighted a desire for more clarity around how we approach our work, including how we make choices in enforcement proceedings. As the securities industry and its regulation have become more complex, so too have the questions about what activities constitute regulatory violations and how best to respond to any particular violation. While there are well-developed standards and processes currently in place at FINRA, we are committed, as part of FINRA360’s review of our enforcement program, to take a fresh look at what we do today and to provide greater transparency and guidance to the industry where appropriate.

We are also continuing to invest in technology to support our regulatory operations and reduce our operating costs over time. As many of you know, for example, our market regulation platforms already run on a cloud platform. Over the next three years, we will migrate the bulk of our remaining applications to the cloud as well. This transformation will improve our ability to provide new regulatory capabilities and to conduct regulatory tasks more timely and efficiently, all in an operating environment that provides equal or better security. The improved automation, and the fact that we no longer have to provision for peak times and can purchase only the capacity that we actually use, will also allow us to reduce costs in a meaningful way.

Making Rules More Effective and More Efficient

As we take a fresh look at our operations, we are also looking at our rulebook to identify opportunities for improvement. Reviewing our rules and how we implement them is entirely consistent with the FINRA360 goal of continual self-improvement. Changes in the industry and markets can affect whether a rule continues to achieve its original objective as well as the burdens it imposes on firms or investors. Regular rule reviews can help us understand whether they can be made more effective and less burdensome, and also identify gaps and areas where investor protections can be strengthened.

One formal process we use to consider potential improvements to rules is our retrospective review mechanism, which FINRA launched several years ago. We have used this process to review our rules relating to gifts and gratuities, communications with the public, and our membership application process. Now that we have some experience with this process, we are considering whether any changes to the process could make it more efficient and better able to achieve its objectives. I would like to see us do more in this area.

Earlier this month we issued a formal request for comment on all of our rules, operations, and administrative processes related to capital-raising and how they might impact capital formation. A vibrant capital-raising process supports both large and small businesses, creates jobs, strengthens the economy and serves the interests of investors. Broker-dealers and FINRA both perform important roles in capital raising, but the process is evolving and it is essential that our approach also evolve where appropriate to ensure that important investor protections are preserved without needlessly interfering with capital formation. I encourage all of you to share your thoughts in response to this notice.

Another set of rules that I have heard a lot about on my listening tour are those that relate to outside business activities and private securities transactions. It has been some time since we issued guidance on these rules, and we frequently hear questions and concerns about what is expected and how to comply. Accordingly, earlier this week we began a retrospective review of these rules—and, here too, I encourage you to give us your feedback.

We have also sought to update our rules on registration requirements to reflect feedback about how those rules have operated over time as markets and firms have changed. Recently, we filed proposed rule changes with the SEC that would make it easier for an individual with no prior securities industry experience—whether an investor, a recent college graduate, or a professional seeking a second career—to take a general knowledge exam as an important first step to entering the industry. This rule filing—which also modernizes our registration rules in other respects—reflects yet another effort to revisit our existing rules and determine how best to modernize them in a way that will both preserve important investor protections and reduce unnecessary burdens.

Supporting Technology Innovation

Another question I sometimes get on the listening tour is what FINRA is doing with respect to technology developments in the financial services industry. FINRA must be actively engaged in thinking through how our rules and programs interact with technology innovations, and at this conference we have panels on a number of fintech-related issues. Over the past few years, moreover, FINRA has engaged in active dialogue with the industry to assess the impact of fintech-related business models and tools on investors as well as broker-dealer operations. We have an internal committee that serves as a forum to identify and prioritize fintech topics that impact the securities industry and to coordinate appropriate regulatory approaches with key stakeholders, including other regulators. We also recently launched a new webpage to aggregate all of our work in this area, including our recent report on the implications of blockchain technology for the securities industry, our report on digital investment advice, and our Investor Alerts on virtual currencies and automated investment tools.

But we can do more. In the near future, we expect to launch a FINRA Innovation Outreach Initiative to proactively engage with those in the securities industry seeking to develop or utilize new financial technology applications and other innovations. This initiative will help FINRA better understand these innovations and how we can foster a collaborative environment for productive interactions with firms operating in this space. It may also allow us to identify areas where we may want to consider adapting our regulatory approach to take into account evolving business models and risks. An important initial step in this outreach initiative will be our Blockchain Symposium in New York on July 13, which I encourage you to attend.

Providing Compliance Tools and Resources

Another area we are focused on as FINRA360 begins to accelerate is finding better ways to help firms comply with the rules. As I mentioned earlier, two guiding principles for FINRA360 are that we remain focused on investor protection and that we identify opportunities to leverage our SRO model. We can achieve both of these goals when we provide firms with tools and resources to comply with the rules—including through conferences like this one. In fact, a common request from the listening tour and other interactions with our members—especially smaller firms—is that we provide more tools to assist firms in achieving compliance.

We are stepping up our efforts in this area. We recently surveyed small firms to determine what resources they use and what additional resources they would find helpful, and are working to respond to their feedback. And just yesterday, Chip Jones announced the launch of our new Compliance Calendar and Vendor Directory—two new offerings that are designed to help you fulfill your compliance responsibilities. For those who missed the announcement, the Compliance Calendar is a way for firms to keep track of not just upcoming filing requirements and other significant deadlines, but also educational opportunities. Soon, you will be able to access a personalized calendar with your firm’s specific information and deadlines in the Firm Gateway. And there are no doubt ways to enrich this calendar to better incorporate other relevant deadlines and dates, so we invite your feedback on how it can be improved. Meanwhile, the Compliance Vendor Directory is designed to help you more easily locate compliance-related vendors, such as compliance consultants, cybersecurity experts, and exam prep resources. You will be able to search for vendors and even compare multiple options side-by-side. It is our hope that these resources, which respond to prior feedback from many of you, will save you time and allow you to select products and services that will best suit your regulatory needs.

We are also expanding our efforts to provide information and guidance in other key areas to support your compliance efforts. For example, just last month we issued additional guidance on the use of social networking sites, which I know has posed a challenge. I encourage you to speak freely with FINRA staff about this and other areas where you think additional FAQs or guidance about rules or policies would be helpful in achieving compliance.

In addition, FINRA’s Report Center supports member firms’ compliance activities by providing online access to 43 different reports on a broad scope of compliance data, ranging from trading activity across products to risk monitoring to disclosure. Last year, these reports were accessed more than 300,000 times by 15,000 users at FINRA member firms.

Take for example our cross-market surveillance report card that we launched in 2016. Although firms generally surveil and review trades for manipulation, bad actors can be very good at concealing their activity by trading across multiple firms, markets, and products. This activity can be very hard for any individual firm to detect, so we are now alerting members when our sophisticated surveillance programs flag a suspicious trading pattern. These new report cards do not reflect conclusions that violations have occurred. Rather, they indicate potential problems that a firm needs to review. It is our hope that you can use this information to upgrade your internal controls and to address any problematic activity long before FINRA can complete a formal investigation. And there is clear evidence that this approach works. As of this March – about a year since we began issuing the cross-market report cards – we have seen a 68 percent decline in layering exceptions. We are planning to expand the program to include two more types of cross-market surveillance alerts by the end of the year.

Another tool that is on its way, and that we have previously previewed in other contexts, is an exam findings report. You all get an individual report after any FINRA exam of your own firm. But we have often heard that it would be useful to learn more about what FINRA is seeing through its examination programs more broadly. So, later this year, we will provide firms with a new report that will summarize key examination findings from across our programs, enabling you to use this information to strengthen your own control environment and address any potential deficiencies before your next exam.

I encourage you to visit the various FINRA booths at this conference that are devoted to highlighting the many other compliance resources we can provide to our members. In addition to the Compliance Calendar and Compliance Vendor Directory, we have other compliance tools and templates to assist member firms. You can talk to our staff to learn about resources available to help mitigate your cybersecurity risks, new and enhanced compliance report cards, an update to FINRA’s Fund Analyzer, fixed income information products, and improvements to the Financial Professional Gateway.

Enhancing Communication and Engagement

A final area that I want to touch on briefly today in connection with FINRA360 is our communication and engagement prog/rams. We cannot be a successful self-regulatory organization without meaningful interaction with member firms, investors, and other market participants. It is essential that we ensure we are engaging with all of these key stakeholders—including all of you in this room and watching online—in ways that are conducive to promoting our shared interest in well-informed regulation, strong compliance, and vibrant capital markets.

Our recent Special Notice on Engagement is a key part of this effort. We are interested in how our existing mechanisms for soliciting input—and there are many—work and how they can be improved. Improving these mechanisms in turn will help us better collect and consider feedback on the many other areas that we are reviewing under FINRA360. The comment period for this Notice was extended at the request of commenters, and I encourage you to read the Notice and give us your thoughts on the tools we use for engagement.

Maintaining High Standards of Conduct

Before closing, I want to highlight another important topic on which we can work together. As I have discussed today, a guiding principle of FINRA360 is investor protection, and we are working hard to make our rules and programs more effective in advancing this mission. That is why, as noted in our annual Priorities Letter, we are devoting considerable resources to mitigate the risk to investors that arises from registered persons who engage in misconduct and from the firms that employ them.

Reducing this risk is important to all of us. Indeed, I have repeatedly heard from members on my listening tour that although the vast majority of registered representatives work hard every day to serve their clients’ interests, FINRA should be aggressive in dealing with the relatively small percentage of bad actors whose actions not only harm investors but also undermine confidence in the industry as a whole.

As you know from the Priorities Letter, FINRA expects firms to do their part in this effort, including by reviewing their hiring practices and their supervisory systems and procedures. For our part, over the last several years we have bolstered our programs that use quantitative data analytics and qualitative measurements to identify and monitor high-risk brokers and firms. In addition, FINRA recently established a dedicated unit focused on monitoring and examining these high-risk brokers.

And just last week, FINRA’s Board approved several new initiatives to further enhance our oversight of high-risk brokers. Among them is a proposed rule amendment to require brokerage firms to adopt heightened supervisory procedures for individuals while a disciplinary case is pending appeal. We also intend to issue a Regulatory Notice to reinforce and clarify firms’ existing supervisory obligations concerning any high-risk brokers they may employ. The Board also approved several other related measures, such as a change to our sanction guidelines to enable adjudicators to consider more severe sanctions when a respondent’s disciplinary history includes significant past misconduct.

This is an area of continued focus by FINRA’s Board and management, and we are reviewing a number of potential additional steps. I also plan to address the topic of high-risk brokers in more detail in a speech on June 12 at the Georgetown University McDonough School of Business. In the meantime, I reiterate that we share a common goal in this area, and I call on all of you to continue to work constructively with us to put in place whatever further measures are required to ensure that investors can have confidence in their investment professionals and that bad actors are removed from the industry.

Conclusion

Like any organization operating in a constantly changing environment, FINRA must continue to evolve—in how it operates, in how it develops and implements policy, and in how it communicates and engages with stakeholders. Our goal of promoting investor protection and market integrity while facilitating vibrant capital markets compels us to constantly assess our work and find ways to be better. And the nature of self-regulation requires us to embrace the challenge of incorporating industry expertise into our regulatory programs in order be a nimble, more responsive regulator that adapts quickly and creatively to change.

Over the last few months, through FINRA360, we have started a process that will enable us to achieve this goal. There is significant work ahead of us—and I look forward to sharing with you our progress in the months to come.

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Now, I would like to spend the rest of my time today hearing from you and addressing areas of interest to you. So I will invite Chip Jones back to the stage to help take your questions.