Remarks at IRI Government, Legal and Regulatory Conference

Susan F. Axelrod

Executive Vice President, Regulatory Operations

Washington, DC

June 12, 2017

As prepared for delivery

Thank you, Drew [Bowden] for that introduction, and thanks also to IRI for the invitation to speak here today. It’s my pleasure to update you on what we are doing and thinking about at FINRA.

I don’t need to tell anyone in this room how rapidly the legislative and regulatory environment is changing and evolving. We are all seeing it and living it every day. But, many of you may not realize that this is also a busy and interesting time at FINRA, as well. Change and regulator aren’t two words that often come in the same sentence, but at FINRA there is a lot of change underway and still more to come. 

This year, 2017, marks an important one in our corporate history. Not only do we have a new CEO, Robert Cook, who joined us last August, but we are also preparing to celebrate 10 years of FINRA. 

In July 2007, I was there when FINRA was created as a result of the merger of NASD and the regulatory functions of the NYSE. It was an important moment in the history of U.S. securities regulation as one of the first major steps to reduce regulatory duplication, with the merging of rule books and the elimination of duplicative exams. It was exciting to be a part of such a process. Ten years later, it’s interesting to look back at how far we’ve come, and I’m very proud of the organization that we’ve built.

At the same time, we all recognize the importance of remaining introspective. As we celebrate FINRA’s 10 year anniversary, we are asking ourselves, how can we make FINRA an even better, stronger organization? How can we ensure FINRA remains vibrant and vital for the next 10 years and beyond? 

That is why Robert Cook has announced a program we are calling FINRA360, a multi-year initiative focused on creating an organization that is committed to continuous improvement. It provides a framework to address feedback we receive from inside and outside the organization, and to operationalize additional changes to produce a more effective, more efficient organization.

We are calling it FINRA360 because we are looking at the organization from all sides and from all perspectives. Nothing is off limits. And we are starting right away. We aren’t going to wait until our review of the organization is complete to start making changes. Rather, these changes will be implemented in phases—and, some are already underway.

One example is our latest retrospective review of our rules governing outside business activities and private securities transactions. While I can’t say much about the review, since we will continue to receive comments through June 29, what I can say is that this is an important area to FINRA.
These rules were designed to protect investors from potentially problematic or risky activities unknown to a firm that could be perceived by the investing public as either part of the firm’s business or having the firm’s backing. And these rules don’t just protect investors. They also protect firms from reputational or litigation risks. That’s why we’re looking for input to help ensure that they are accomplishing what they were designed to do, and that they are doing so in the most effective manner possible. 

This FINRA360 review is important, because of the sheer breadth and scope of FINRA and our mission. We touch on so many parts of the industry, it’s essential that we ensure that we are all working well together as possible. We want to be very thoughtful about how we undertake our responsibilities and we want to ensure we are using our resources as efficiently and effectively as possible.

In fact, within my group, Regulatory Operations, we’ve been looking for a number of years at how we could do things differently within our part of the organization.
In order to do our job as regulators, it has always been essential that we keep up and remain on the forefront of all that change because our member firms are working in an increasingly competitive landscape, developing new products, adopting new business lines and exploring new technologies every day.
When a new product emerges, we must understand it and its risks so we can ask the right questions about suitability. When the industry is faced with rising interest rates, we must remain on top of the potential impact of rate hikes on products and concentration levels. Understanding such issues is of fundamental importance to our mission of investor protection. 

A few years ago, we took a step back and asked ourselves, what if we actually worked to connect directly with investors? This might not seem noteworthy, but connecting with investors was never a focus for FINRA’s regulatory programs. At the time, our contact with investors in Regulatory Operations—as with most regulators—was solely through our formal complaint system. The formal complaint system was—and remains—an essential function, it is a reactive way to deal with investor issues, but doesn’t allow regulators to proactively get at areas of current investor concern. We wanted to take it a step further, so we could learn about potential areas of concern firsthand.
With that in mind, we created the Securities Helpline for Seniors—a toll-free number for senior investors to get assistance from FINRA on concerns or questions with brokerage accounts and investments. Seniors have unique needs and concerns, so when we wanted to explore ways to work more closely with investors, it seemed like a perfect fit. After all, an investment mistake when you are 40 years old gives you years to recover—and leaves you the opportunity to delay retirement if you must. But a mistake when you are 75 years old can be devastating.

Just over two years later, I’m proud of the successes we’ve had. So far, we’ve opened more than 9,900 calls from seniors and their families seeking help. Those calls have helped make us a better, smarter and more engaged regulator and a better listener, because we are hearing first hand the questions and concerns of real investors.
The calls cover a wide range of issues, including simple questions like “What is an annuity,” or “How can I find out information on my broker?” But they can also deal with bigger issues of suitability, transfer of account problems or misrepresentation. And of course, we’ve also received calls that indicate possible fraud and sales practice issues like unauthorized trading.

In some cases we’ve been able to provide the senior investor, or their family, with enough information and understanding of brokerage operations so they can in turn help themselves. And in other instances we’ve advised seniors who thought a firm had taken advantage of them, and helped them work with the firm to be made whole.
In fact, that is one remarkable outcome. We have been able to get real money back to investors with no lawyers and no arbitration. So far, firms have returned more than $4.5 million to customers from issues raised to them by the Helpline.

Of course, not all of the calls reveal problems. We had one case where an investor was concerned about trading in his account. When we looked at the statements, it was clear that the transactions were appropriate. But that senior said that he “would be able to sleep better at night” now that he had been able to tell his story to someone who not only had the ability to analyze the situation, but was there to listen. And that’s actually a common theme. That senior is far from the only one to tell us we helped him sleep better, or we helped relieve anxiety around investing. 

Most of our calls are simply educational, and there is real benefit there, not only for the caller, but for us as well. We’ve issued 13 new or updated Investor Alerts in the past two years as a direct result of calls received through the Helpline. 

When we noticed a pattern of calls related to power-of-attorney transfers on death, not having the right paperwork in place to facilitate those transfers, and the frustration of children having to move or find those assets, we issued a new Investor Alert to walk individuals through that process. 

And when we noticed a number of calls into the Senior Helpline highlighting problems firms may face when it comes to diminished capacity of a client, we went even further, proposing—and this year enacting—new rules that permit firms to place a temporary hold on a disbursement of funds or securities from a customer’s account where there is a reasonable belief of financial exploitation, such as fraudulent activity or unlawful conversion, and that will allow firms to ask for customers to provide a trusted contact person, who could be notified of the firm’s decision to place the temporary hold. 

And this may come as a surprise to you, but the Senior Helpline has allowed us to improve our relationship with the industry, as well. 

The industry was a bit hesitant as we embarked on this project, and that was understandable. Some thought it would be a treasure trove for exam cases or enforcement actions. But now, two years later, they can see that it hasn’t. Instead, we work closely with firms on matters raised through the Helpline, asking them to undertake a review of the issue at hand and to make a decision. 

There is no poking, no prodding and no suggestion. We really just want the firms to take the initiative to do the right thing, and we are very proud of that and the working relationships we’ve been able to develop.
We aim to be as transparent as possible with firms. In cases where we receive a large number of callers from customers of a firm, we are sitting down with those firms, sometimes for hours at a time, and breaking things down by category to help them learn where they can be doing a better job. Now, we are exploring ways to enhance that transparency and improve our process of communicating this information with firms. Because one thing we’ve learned over time is that good firms want to get it right. Good firms appreciate this transparency because it enables them to do a better job, to become more self-aware and to be proactive in making changes to protect senior investors.

We truly appreciate our continued partnership with member firms on these matters, as well as other organizations out there that are also focused on senior investors.
Still, for all our focus on senior investors, we are also thinking about challenges facing the industry on the opposite side of the generational spectrum: Millennials.
Today, millennials make up the largest share of the labor market. By 2020, 30 to 40 percent of baby boomers are expected to retire, leaving millennials to account for 50 percent of the global workforce. By 2025, that will jump to 75 percent of the workforce. This generation—born between 1982 and 2004—are no longer the leaders of tomorrow. They are, increasingly, the leaders of today.

None of us want to be defined—or limited—by our age. This is something we’ve found to be true with millennials and seniors alike. Millennials don’t like to be called millennials, and seniors don’t like to be called seniors. But the reality is millennials think and act differently from other generations. Trust me, I know. I have two millennial sons, and I know what it’s like to fight against an iPhone for their attention.

These differences matter to the financial services industry not just because this group represents the investors of the future, but also because it is making up an increasingly large portion of our workforce. We have work to do in attracting them to the financial services industry as employees if we want to avoid the looming succession cliff.

The number of financial professionals advising clients in 2014 was about 285,000, down nearly 2 percent since the year before. Since 2008, the professional headcount has dropped by 39,000 as older financial professionals retire and as too few young people enter the field to replace them—something we are hoping to help address by making it easier for people to enter the industry.
In March, we filed a proposal with the SEC to streamline competency exams and facilitate opportunities for professionals seeking to enter or re-enter the securities industry. This new approach would give individuals seeking to enter the securities industry the opportunity to demonstrate a fundamental knowledge of regulatory requirements prior to joining a firm, potentially providing firms a larger pool of qualified candidates.

Yet, even when we succeed in attracting millennial talent, our work is not done. We’ve heard that millennials in general show very little loyalty to the organizations for which they work, and one Deloitte study highlights the extent of the challenge. If given the choice, one in four millennials would quit his or her current job to join a new organization or to do something different. By the end of 2020, two of every three respondents hope to have moved on from their current job. Meanwhile, only 16 percent said they saw themselves remaining with their current employer for the next ten years.

I can tell you that this is a serious challenge for any business that hires a large percentage of millennials. We face it in our group. About 30 percent of the employees I oversee in FINRA’s Regulatory Operations departments are millennials, and so we are constantly asking ourselves how to keep them engaged.
Last year, we brought in a millennial consultant to talk to senior staff and help us sift through the myths and misunderstandings about millennials. You’ve heard some of them—lazy, self-absorbed, noncommittal, a generation with unrealistic expectations. The reality is millennials are the most-educated generation—52 percent of millennials attended college, versus 32 percent of baby boomers—and they are hungry to do great work and hungry to build meaningful careers.

There are a number of steps we can all take to keep these employees engaged, from ensuring a strong commitment to professional development programs or rotational assignment programs to promoting an atmosphere with a good work-life balance. 
Yet, while it is important for us all to think about millennials as employees, increasingly, we must at the same time think about them as the next generation of investors. Right now, they are largely investing from their own earnings, but over the next several decades, we are going to witness the greatest transfer of wealth in history. In the coming years, baby boomers will pass down an estimated $30 trillion in assets to their children and grandchildren. And so we all need to think about how we communicate with this generation now.

These children and grandchildren experience the world and approach investing differently. Baby boomers, the seniors we work with through our helpline, grew up saving and grew up investing. And some grew up spending their entire career with one organization. That is not the experience of millennials today. 

A millennial’s world is framed, on the one hand, by technology and the vast opportunities it offers to create, from transforming industries and processes to allowing for collaboration from a distance. On the other hand, a millennial’s reality is shaped by the Great Recession and the massive amounts of student debt they carry as a group. These factors affect so much more than millennials’ ability to set up a home away from mom and dad or to purchase their first home or car. These factors underlie the way they work, their expectations of the organizations for which they work and the companies in which they invest.
Quite simply, tech-savvy millennials are rewriting the rules of the financial marketplace. In fact, the banking industry is at the highest risk of disruption by millennials. Indeed, the Millennial Disruption Index—a survey of 10,000 millennials—found that 73 percent would be more excited about a new offering of financial services from non-traditional financial institutions like Google, Amazon, Apple, Paypal or Square, than from their own commercial bank. And 71 percent would rather go to the dentist than listen to what banks are saying.
The statistics are sobering. To the point I made earlier, the financial services industry has to adjust its thinking about millennials to meet the new challenges ahead.

The reality is that technology savvy investors want to interact with financial firms in digital ways. Take my son, Jake, for instance. He’s 23 and working for his first time after college. We had a conversation about saving and investing now that he is earning a salary, and he tells me he already knows how he’s going to invest. He is going to open an account with a robo advisor that he can access from his phone. He said it’s easy, he trusts it—and here’s the kicker—all his friends are doing it. He had no interest in talking to our family friend, who has been a financial advisor for decades. 

Many firms in the securities industry are noting this trend and responding with new digital investment advice tools to help customers like Jake who want to invest on their own to develop and manage their portfolios. As with any new financial tool, the use of digital investment advice tools brings up concerns about the role of financial professionals and the evolving relationship between financial intermediaries and their clients. 

We need to ask ourselves: what role will financial professionals play in tandem with digital services in providing investment advice? To what degree will investors rely primarily on digital investment advice? How well can software know a client? Can the skill, knowledge and service provided by well-trained and ethical financial professionals be incorporated in software? Can that software provide sound personal advice, especially for clients with more complex advice needs?

As a regulator, these are the kinds of questions that FINRA is thinking about. In 2016, we published a report on digital investment advice to look at the growing field and to remind broker-dealers of their obligations under FINRA rules. We also shared effective practices related to managing the underlying technology, developing portfolios and mitigating conflicts of interest.
This year, in recognition of the increasing use of social media for communicating with investors, we updated our guidance. The regulatory notice on social media looked to remind firms of the recordkeeping, suitability, supervision and content requirements for such communications in light of emerging technologies and communications innovations. If you haven’t seen it, I encourage you to read it.
Beyond that, we must keep the unique concerns of millennial investors top of mind. Research from the 2016 FINRA Investor Education Foundation’s National Financial Capability Study also tells us that millennials are struggling financially, with 43 percent of millennial respondents who ‘probably’ or ‘certainly’ could not come up with $2,000 in a month’s time, compared with 34 percent of the overall population and 25 percent of those over 55. Compared with the overall population, millennials were also significantly more likely to have taken a loan or hardship withdrawal from their retirement account or to have been late paying their mortgage. And even though millennials make many decisions related to investments and debt, many of them show very low levels of financial literacy. 

This issue of balancing debt and saving for the future is a big one. It is something we’ve heard as we’ve engaged our own millennial employees at FINRA. Many say they struggle to find the right balance between paying off student debt and putting money in their 401(k). We are thinking of new ways to help better educate these young investors to help them take advantage of one of their most valuable assets: time. 

Together, these two generations—millennials and baby boomers—are shaping the way we think about FINRA now and FINRA tomorrow. It’s why as an organization, we recognize that we can never stop listening to our stakeholders. And, it’s why as an organization with a long and rich history of protecting investors, we know we cannot stop evolving to become the most efficient and effective organization we can be.

As for me—and many of you in this audience—for now I remain fixed firmly in the middle of two generations. It’s a middle ground where seniors, like my parents and in-laws, view me as a technological genius, while my sons like to think of me as technologically illiterate. But that is why we must provide a strong example of protecting senior investors, we must educate our children, and we must guide the financial system to a secure future, so our children can continue to look out for us for years to come. 

Thanks for listening.