PODCAST
A Conversation with FINRA CEO Robert Cook and Small Firm Advisory Committee Chair Preston Haxo
Small firms face unique challenges. The regulatory landscape is evolving rapidly. And the conversation between regulators and the regulated is more important than ever. How does FINRA ensure that small firm voices are heard? How do small firms navigate an increasingly complex environment while serving their clients effectively?
On this episode, we bring you a conversation between FINRA President and CEO Robert Cook and Small Firm Advisory Committee Chair Preston Haxo from FINRA's Small Firm Conference in Dallas on Oct. 9. The two explored the vital role of the SFAC, the ongoing progress of our FINRA Forward initiatives, the practical ways small firms can engage with FINRA, and more.
Resources mentioned in this episode:
Small Firm Advisory Committee (SFAC)
FINRA Crypto and Blockchain Education Program
Reg Notice 25-13: Form U4 Recordkeeping Requirements
Reg Notice 25-07: The Modern Workplace
Reg Notice 25-06: Capital Formation
Reg Notice 25-04: Rule Modernization
Blog Post: FINRA Forward’s Rule Modernization—An Update
Blog Post: Vendors, Intelligence Sharing and FINRA’s Mission
Blog Post: FINRA Forward Initiatives to Support Members, Markets and the Investors They Serve
Ep. 177: Previewing FINRA’s Crypto and Blockchain Education Program
Listen and subscribe to our podcast on Apple Podcasts, Google Podcasts, Spotify, YouTube or wherever you listen to your podcasts. Below is a transcript of the episode. Transcripts are generated using a combination of speech recognition software and human editors and may contain errors. Please check the corresponding audio before quoting in print.
FULL TRANSCRIPT
00:00 – 01:24
Margherita Beale: Small firms face unique challenges. The regulatory landscape is evolving rapidly. And the conversation between regulators and the regulated is more important than ever. How does FINRA ensure that small firm voices are heard? How do small firms navigate an increasingly complex environment while serving their clients effectively? That's what FINRA's President and CEO Robert Cook and Small Firm Advisory Committee Chair Preston Haxo explored together on stage at FINRA’s Small Firm Conference on October 9th. You'll hear all about it on this episode of FINRA Unscripted.
Welcome to FINRA Unscripted. I'm your host, Margherita Beale. Today, we're bringing you a wide-ranging conversation from our Small Firm Conference in which our CEO Robert Cook and Small Firm Advisory Committee, or SFAC, Chair Preston Haxo gave a glimpse into how FINRA's regulatory approach is evolving to better serve firms and how small firms can help shape that evolution. The two explored the vital role of the SFAC, the ongoing progress of our FINRA forward initiatives, and the practical ways small firms can engage with us. All of this and more on this episode of FINRA Unscripted.
And now here is that conversation between Robert and Preston.
01:24 – 02:01
Robert Cook: Good morning, everyone. Preston, thanks for joining me.
01:27 – 01:29
Preston Haxo: Absolutely, great to be here.
01:29 – 02:01
Robert Cook: Yeah, so as Kayte [Toczylowski, FINRA Vice President of Member Relations and Education] said, we're going to do this a little bit different than maybe you've seen us do these things in the past. It's going to be more interactive. I don't know if you know Preston, but he's all about getting down to business. And so, he asked if we could do his exam just right now, get it out of the way. So, I have 235 questions for you. Just open initial questions for you. But I did want you to get a chance to meet Preston a little bit. Preston, maybe you could share a little bit about your journey that brought you to the SFAC, as we call it, and why did you get interested in being on the SFAC and then how did you become chair?
02:01 – 02:24
Preston Haxo: Yeah, so I first became aware of the SFAC or the Small Firm Advisory Committee back in 2021 when I was participating in the CRCP program with Georgetown, which by the way, quick digression, fantastic program, would highly recommend to anybody that's interested in deepening their understanding of the securities industry and also to network with some really like-minded people. So that's my shameless plug for the CRCP program and for people to apply to the next session.
02:25 – 02:27
Robert Cook: You also get a special banner on your…
02:27 – 04:18
Preston Haxo: True, you do get a special banner, so a little cherry on top. In any case, one of the presenters at the CRCP program was discussing the committee structure and basically the feedback loop that exists between FINRA and the committees and the committees at FINRA. And that really got the wheels turning for me and it was something that I was interested in pursuing if the opportunity ever presented itself.
The next year, I was attending the FINRA Annual Conference down in DC. And there was a booth set up encouraging folks to fill out Indication of interest forms to get more involved with FINRA. And so, on the long Amtrak ride home, I filled out the form and I patiently waited. Fast forward to 2023, and I was asked to participate in the Small Firm Conference in Santa Monica to discuss the forthcoming at the time RSL designation and also some remote supervision best practices and I guess the panel went okay because later that year, FINRA asked me to backfill an open seat on the SFAC.
And my SFAC term officially started in January 2024 and I've had a fantastic time. It's been such a great experience. The committee is comprised of some really engaged and insightful members of the small firm community, many of whom are here at the conference so please look out for them. I know Kayte mentioned the maroon lanyards. It's kind of like a scarlet letter now that I think of it. But please introduce yourselves. know that they would welcome the opportunity to speak with you.
At the end of my first year, Carlos, he was the chair for the prior two years and was rolling off the committee. And I threw my hat in the ring and was very fortunate to be appointed. As far as motivations for joining the committee, I think that the opportunity to actively participate in the regulatory process was incredibly appealing to me. Additionally, I saw it as a great chance to network with some fellow small firms and to really get a much better understanding of all the FINRA resources because there are certainly so many.
04:18 – 04:31
Robert Cook: So maybe we could exchange perspective a little bit on the SFAC and the role it plays within the FINRA structure. And then, you know, as an advisory committee, the work it does, maybe you could start by sharing a little bit about how does it work, from one of the insiders.
04:31 – 06:07
Preston Haxo: Absolutely. Yeah. I mean, the SFAC plays such an incredibly vital role within the industry, and certainly for FINRA, I think. The core function of the committee is to advocate for small firm interests and to make sure that those interests and any concerns that small firms have are heard by and considered by FINRA, and specifically the FINRA Board of Governors. What that looks like practically is meeting on a quarterly basis as a committee, where we will discuss and review new rule proposals, amendments. We also provide guidance and feedback on strategic initiatives or programs that FINRA is considering. As committee members, I mean, our role is, I think, to part of advocating is connecting and communicating with small firms, right? So, I think a lot of that is just making yourself available and being able to talk with people if they reach out, have a phone call with somebody, listen to the concerns and make sure that those are kind of forwarded on to FINRA.
I had a firm reach out just last week, a relatively new firm that was interested in bolstering some of their compliance program, and it was a great opportunity to direct them to the compliance tools that FINRA has made available. So, there's some great checklists and templates that FINRA has published, so I was able to forward those along, and I think that's a good example of directing people to where the resources are.
I also think that part of it is escalating concerns as they come up. And so we had a recent instance when a firm reached out with a concern over an exam. And we hope that that doesn't happen often, but when it does, we want to make sure that those firms are kind of directed to the office the OMBUDS and Sarah Gill’s team, so that they can look into it as an impartial party. So again, I think it's making sure that the resources are available for firms and connecting them with the right people.
06:08 – 07:18
Robert Cook: So those anecdotes are so important because I think they highlight really kind of an expectation of that committee, which is that you're not just there to represent your own firm, but also to really facilitate a two-way flow of information between FINRA and as many small firms as possible, recognizing it's a large number, but you know, to share the perspectives of small firms, even if they may not be your firm's perspective. And that's a lot of work we really do. This is a hard-working committee, I have to say. You know, we have several advisory committees. This one takes its work very seriously. Always comes prepared, often meets, regularly meets, in advance before meeting with FINRA to give us the feedback, and has carefully studied the materials. And in many instances, including over the last year or so, I've seen instances where the rules have evolved based on the feedback, sometimes specifically to accommodate small firms, sometimes to the benefit of all firms. So, it's a lot of work, and we do appreciate that.
And also, as you were also explaining, helping firms navigate FINRA, these are people who tend to be more in the know about what's going on and current developments, and these things are true, really, of all the committees, but especially the SFAC could be a resource to your colleagues in the small firm community.
07:19 – 07:32
Preston Haxo: I think that's a key part that you mentioned, how when you're going in there, obviously everybody has their own agenda with the firm that they're representing, but I think that it's really important to recognize that your role is to represent all small firms. So, yeah, a key part for sure.
07:33 – 07:45
Robert Cook: So, what are some of the issues that you're hearing from small firms these days, and any trends, if you look back over your time in the in the industry or on the committee, in terms of where are new issues or same old issues?
07:46 – 09:18
Preston Haxo: Interestingly I would say that the concerns of small firms, at least those that make it to my ears, have remained relatively consistent over the last several years. I think it tends to be those evergreen issues, the ongoing challenge of resource constraints, both from a financial perspective, but also from a personnel and from an expertise perspective, continues to be a big hurdle to clear. I think that the ability to navigate what's become an increasingly complex and crowded regulatory landscape is certainly a challenge, and not specific to FINRA, but also the SEC and the states and all the other regulatory bodies that that we regularly interact with. So that's certainly a challenge.
I think despite a lot of effort made by FINRA, understanding how to navigate the FINRA infrastructure and find all the resources that are available, it can pose a challenge. I mean, even in my position on the small firm committee, I still at times feel overwhelmed by how many resources there are, and it's difficult to know who best to talk to, where to get information, so I think that is part of it as well.
The last concern I will mention is just the arduous task of really keeping up with regulatory change. I think that any time there are changes to existing requirements, those moments of transition, they can be disruptive, they can be confusing, and frankly, they can be expensive for small firms. So, I think the themes are the same, but the pace of change and the new technology that we're seeing are intensifying the kind of demands on firms’ resources. And I think it's this consistency and concerns that emphasizes the importance of FINRA’s role in providing clarity and guidance and support.
09:18 – 09:44
Robert Cook: Yeah, I think a lot of those concerns are, frankly, things we also hear from many large firms or midsize firms, but the difference is that there's more resources at the mid or large firm level to be able to navigate the website or keep up with change in rules. And so, the economies of scale and compliance kick in as the firm gets bigger. And so, while the many of the issues are similar, the impact is different.
09:45 – 04:59
Preston Haxo: Absolutely. I mean, it becomes a numbers game if you only have a couple of people, it's harder to do those things for sure.
09:50 – 09:52
Robert Cook: Which maybe brings us to FINRA Forward.
09:52 – 10:19
Preston Haxo: I think it does. So, earlier this year, FINRA launched FINRA Forward, and there were three key initiatives. I think we're learning to know them and love them. Modernizing rules, empowering member firm compliance, and enhancing cyber security and fraud prevention. So, I know that attendees will hear more about these initiatives and dedicated sessions during the conference, but I'd be curious how you feel these initiatives specifically address small firms, and if you could talk a little bit about that.
10:19 – 16:53
Robert Cook: Sure. And again, I think I hope you'll hear a lot more about these, as Preston said, at the various panels, because, fortunately, at this point, we have enough to talk about that there's no way I could cover it all today. But I just to take those areas that you described.
[On] rule modernization there's a number of those rules which respond, that are already filed with the commission, or that we've already announced that we plan to file with the commission that respond to some of the feedback we've heard from small firms over the years. Say gifts, for example. You know, that's been a pain point, and I've even at the conference so far, I've already heard a number of firms come up to me and ask, “Hey, you know, when will it get approved, and is the shutdown going to delay approval? That gifts rule, we really want to get that, get that approved.”
But take something like the outside activities rule. I remember my very first Small Firm Conference, this was raised as a major pain point for small firms, and I, you know, I'm sorry it's taken this long, but I'm delighted that we're actually, you know, at the point of, hopefully fairly soon, when the government reopens, filing that proposal with the SEC, and I think that people will recognize a lot of the changes that are in it from the conversations we've had over the years with the SFAC and the comments that we received and so forth.
And by the way, you mentioned that that's another important reason to have the SFAC is because writing comment letters takes a lot of time and effort, and we love getting them from small firms, [but] we recognize small firms can't always take the time to do that. And so, this is, in a way, a source of great comments for us on the rule modernization stuff.
There are pending rules at the SEC waiting approval on CABs, capital acquisition brokers, on corporate financing. We're going to refile our proposal on projections, which we're going to expand from the previous proposal that got sort of tentatively approved but then got delayed. So, there's a lot going on in the rule modernization. We got great feedback from the industry on, you know, the things that we should be focused on. Now, it's really a question of prioritization. There are a bunch of things in the pipeline, but we've got so many great comments about areas we need to address that the challenge for us is figuring out, which ones go next? And so, we are engaging with our advisory committees to get ideas or insights into what's the next most important issue for you? And so, we'd love to hear from you at this conference.
The second area, some of the concerns that you've mentioned that are evergreen are, how do we reduce burdens on compliance. We recognize that firms in general are at the front lines of compliance. You are the protectors of your investors, and we need to figure out, how do we help enable that? We obviously have a duty to oversee that it's happening and happening properly, but we also have an obligation to make sure that we're not imposing unnecessary burdens in how we do that and, where we can to, provide tools and resources. So, I hope you'll hear at the conference, a number of tools and resources have been rolled out already, some leveraging our systems and data.
So, for example, the recently announced ability to do things like rely on the CRD system to maintain the electronically signed U-4s, or the upcoming ability to deliver certain required information under or related to U4, U5, arbitration stuff to deliver that out through FinPro. We are expanding our report card offerings, and I'm sure you'll hear, have opportunities to hear some more about that at the conference. We're also looking forward to offering more of a dashboard overlaying all the report cards so you can do more data visualization and customization of the views that you're getting into the data that we're giving back to you to facilitate your compliance. Finding ways to provide more actionable guidance that you know and resources you mentioned, the resources that you Know you look forward to figure, you know, navigating through FINRA, how do we streamline that for folks, and how do we provide interpretive guidance where we can.
The crypto training I think I’d put into this bucket too. We just announced that offering that is available online, as an in-person component too. A lot of firms are very deep in the crypto space. A lot of others are not so much, and even within individual firms or people who may be focused on, others who aren't, but it's a growing asset class, and a lot of people are at the point where they recognize maybe I now need to take this seriously and really think about it, and how do I learn about it? And so we've made that available through the Gateway for firms to subscribe to.
And another thing is also the data requests that we make. We've been focused on, how do we shrink down the footprint? It's a burden for firms to have to respond to overly broad data requests we've seen, for example, our blue sheets have shrunk by over 50% in the last couple years. Our request for data blotters have shrunk over 60% in the last few years. And that's trending and continuing to trend in the right direction. So that, how do we, you know, enable compliance and reduce the burdens on compliance.
And then the third area is, how do we help firms fight cybersecurity risks? How do we help them fight fraud? I mean, I'm hearing about this all the time from our member firms, how painful it is now, how they're seeing their investors be taken in by scams left and right, and how ubiquitous the scammers have become, and how sophisticated, scary sophisticated, some of their techniques have become, relying on AI, visual, videos, voice impersonation, all that stuff. What can we do about that? And this is an obligation. We all have to kind of work together. And we really think of this as a let's work together moment for the industry. And so the FIFC that's rolling out, some of the workshops that we're doing, I encourage you, if you're interested in this, to participate some of these special workshops. There's one just yesterday here. I think there's one in Chicago the week after next, we're doing live tabletop exercises, so you can have the experience of, you know, what's it like to go through a challenging event? We do these internally at FINRA. They force you to confront the uncomfortable and think about, where are we good? Where do we need to get better? And you definitely want to have some of that experience, if you can before you know real life happens, and you have to deal with. So, I think there's just a lot going on in all these areas. Again. Stay tuned for these, further discussion in more detail on these and other things at the conference.
But I did want to just mention that we've put out a special, created a special page on our website that is devoted to updating you on various FINRA Forward initiatives. What have we accomplished? And our commitment is to keep that updated over time. And Bob Colby put out a blog that's on our website where he talked about the rule modernization, piece of it, but that blog has a link to it. That's probably the easiest way to find this piece of our website is go to Bob's blog and click on that link, and you'll, you can bookmark that page and keep track of what's, what's, what we what we're doing in this space.
16:53 – 17:14
Preston Haxo: That's a lot. Yeah, wow. Okay. I mean, I'll say one thing I was, I was thrilled to see the recent SEC no-action letter about the ability for firms to use Gateway, to sign Form U4s, I think it's, it's a good example of identifying a small pain point and just addressing it right, like you still have to go through the steps of addressing it. So, I think the more that you can do that, the more it improves the regulatory experience. So I think that’s a good—
17:14 – 17:49
Robert Cook: I'm so glad you said that, because sometimes these things seem like, oh, it's not a big deal, or it's not big enough for FINRA to care about. And please don't let that stop you from bringing that idea forward, because we recognize that all these burdens that you have to deal with are, you know, there are some big ones, but many of them are the accumulation of little ones. And the more we can just knock out these little ones, the better off we'll all be. And frankly, some of this is win-win, because some of this, there's no reason why the rule needs to continue the way it has been. Sometimes the solution is more efficient from our perspective as well. Yeah, we look forward to hearing more of those ideas.
17:49 – 17:58
Preston Haxo: Great. So, as FINRA continues to make forward progress on FINRA Forward, are there any significant announcements or upcoming developments that you'd like to share with the class today?
17:59 – 22:46
Robert Cook: I'll mention a couple things that are FINRA Forward adjacent, maybe I'll call them. So, one is that we announced where we're undertaking a review of our Enforcement program. Bill St. Louis, our head of Enforcement and his team have underway a series of enhancements to the enforcement process. I hope none of this is ever relevant to any of you but, but they're working on some enhancement to the process that I think are common sense, you know, opportunities to provide more transparency and more checkpoints with the firms as we as an enforcement investigation proceeds.
But in parallel with that, we've asked some outside experts to sort of help us make sure we're not just listening to ourselves on what we should be doing about Enforcement but listening to them and to you. And so, these folks have been meeting with our advisory committees. I think they met with the SFAC and other advisory committees, they’re meeting with practitioners and the like. And so, they're probably closer to the end and the beginning of their review, but that should lead to, it will lead to some further changes that we'll be making, process and governance and other sorts of changes in our Enforcement program. And we will provide some update, some transparency to you about, you know, what was it that they/we heard? And you know, what changes are we making in light of that.
Second, we've made some significant internal organizational changes. We announced a week or two ago in an email to all firms, so if you're on that, you would have seen it. If you're not, somebody in your firm saw it, and tell them to share with you. And so, one was to consolidate our regulatory programs into one group, our Enforcement, Member Supervision and Market Oversight. We've been working on, we call those collectively RegOps, and or regulatory operations. We've been working for number of years on coordinating more closely between them. Think about, you know, the experience of getting a request from one area and then getting the same request from another area, or things like that that we want to try to address and have appropriate information sharing and the like and resource technology, etc. We decided to go the next level of that coordination. Really need to have a single department. And Greg Ruppert, who is our head of Member Supervision, is now head of those combined areas. They are still going to be maintained separately, Enforcement, Member Supervision, Market Oversight.
And then separately, we created a new group that we call Market Regulatory Services, which is really all the utilities we operate. These are these are things like the CRED, you know this, the CRD, Broker Check, registration systems, the testing systems, and the trade reporting facilities, the TRACE, CAT, the work we do for the exchanges. These are all areas where there's a lot of technology, a lot of operations, there's a lot of costs to be managed. There are also usually fees associated with many of those services. And so, they all had certain similarities and those and also, they all are areas where we provide the service, not only the FINRA, but to other external stakeholder like the exchanges. And so that's now its own area, and that's reporting to Stephanie Dumont.
Those of you a long time FINRA/NASD followers will know that the first change I mentioned actually is going back to a model we had a long time ago, and things just evolved, and we decided it's appropriate to go back into that approach. This Market Regulatory Services group is new.
Third thing I'll mention is that we're doing a lot of other internal changes at FINRA. One that I thought you might be interested in is that we are going to, over time, evolve to requiring all of our regulatory people to have to be taking the CE regularly and to take qualification exams. Many of them do or have in the past. Many of them, people from the industry, have joined us, and they've taken their exams already. You know, obviously, depending on what positions they held. And some FINRA personnel have done it on their own, because they've been able to do that in the past while FINRA employees. We're going to make it a requirement. So going forward, the FINRA teams, and this will take some time to implement, we need to do this over, roll it out over a period of time. But the FINRA examiners, for example, will have taken the relevant exams for what they're what, for their area of focus. So that'll be a take a very helpful step for helping our team kind of walk in your shoes, and also help us better understand the qualification experience and how it relates to the work that you're doing day in and day out at a firm.
So, the other thing is, we're doing a fair amount of other kind of streamlining of groups and smaller reorgs and expense management. We'll focus very hard on managing the expenses of the organization carefully. We did a fee rebate earlier this year. I expect our budget for next year will be lower than our budget for this year, and I think all that's hygiene. And if we're lucky, we'll be in a position to do further work on the revenue side, whether it's rebates or deferrals of fees and the like. So a lot going on internally, in addition to kind of these more external experience of FINRA Forward.
22:47 – 23:02
Preston Haxo: I mean, I think that's fantastic news about the examiners taking the exams that we all take. I think that'll be a really unifying thing for the industry, because now we can all commiserate over stressing out about exams and taking training modules. So that's fantastic. Really, really glad to hear that. Yeah, maybe just we could.
23:02 – 23:18
Robert Cook: We could close by talking a little bit again about the, you know, what the value to small firms of engaging and how to do it, what would you be advice? Your advice to, you're not all going to be on the SFAC unfortunately, but what would your advice be to firms about how to engage and why engagement is helpful?
23:19 – 25:05
Preston Haxo: Absolutely. I mean, there are a bunch of ways to get involved with FINRA, and it is not limited to being on a committee. You could join a working group. You can participate in beta testing for new FINRA products. You can opt into pilot programs like the remote inspection pilot. You could respond to surveys, you could submit comment letters, but it could be as simple as just submitting an idea on the firm Gateway. There exists a functionality to go in and say, “Hey, I'm very interested in this type of new report, or “I think that this change would be make this system more accessible or intuitive.” So, all of that feedback is incredibly valuable.
And I think another good entry point is just reaching out to your committee reps, and not specific to the Small Firm Advisory committee, but also to the Regional Committee. All of our contact information is available on the FINRA website. So, I would really encourage you to reach out, get to know your committee reps, because we're here for you.
Look, small firms offer a really unique perspective in the industry. And I think the more involved that we can be, the more insight FINRA will have into the challenges that we face on a day-to-day basis. Because of that, I think it's so critically important for FINRA to promote time efficient engagement opportunities. And I think having short, focused activities can be way more approachable for firms that are interested in getting involved but don't necessarily have a tremendous amount of time to do so.
The one idea that I'd love to see is engaging actually, well, expanding the Engage with FINRA webpage to include some type of matching tool where you could put in your information say, “Hey, I have this much time to devote, and I'd be interested in these types of things,” and then get suitable engagement opportunities that kind of match your time commitment.
To me, I think the overarching theme is, it's meeting firms where they are. It's recognizing their constraints, it's valuing their perspective, and it's tailoring engagement opportunities to their availability and their and their preferences.
25:05 – 25:34
Robert Cook: Yeah, those are some great insights I love. I love that idea we should think about, that you know, based on your preferences you might be interested in, or other firms like you have also like this.
But I think this, your thoughts about why to engage are really helpful. From the FINRA perspective, we benefit from it. But I've also experienced over time that the firms who spend a little time doing that also benefit themselves from it, right?
25:26 – 25:27
Preston Haxo: Absolutely.
25:27 – 25:34
Robert Cook: People who take a little time to get to know FINRA, or to try to build connections with FINRA, tend to have a better experience with FINRA.
25:34 – 25:35
Preston Haxo: 100 percent.
25:35 – 25:50
Robert Cook: I hope it's you know, not only good for you, but your engagement improves the ecosystem, but I hope you will also find it improves your personal experience with FINRA. That’s the time we have so thank you very much for your attention.
25:51 – 26:11
Margherita Beale: That's it for today's episode of FINRA Unscripted. Listeners, if you don't already, please be sure to subscribe to FINRA Unscripted wherever you listen to podcasts. All of the resources mentioned in today's podcast will be included on the homepage for the podcast episode. Today's episode was produced by me, Margherita Beale, and engineered by John Williams. Until next time.
26:04 – 26:17
Outro Music
26:17 – 26:51
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