PODCAST
Introducing REMA: Thinking Differently About Rulemaking, Decision-Making, Innovation and More
FINRA recently announced the creation of a new team, the Office of Regulatory Economics and Market Analysis, which brings together FINRA's Office of the Chief Economist and the Office of Financial Innovation.
On this episode, we talk with Jonathan Sokobin, Executive Vice President and head of REMA, Haime Workie, Vice President of the Office of Financial Innovation, and Lori Walsh, Vice President of the Office of the Chief Economist about how the new team works to inform FINRA's regulatory policies and programs to advance its mission of investor protection and market integrity.
Resources mentioned in this episode:
Episode 16: How FINRA Rules Get Made and Reviewed
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FULL TRANSCRIPT
00:00 - 00:23
Kaitlyn Kiernan: FINRA announced the creation of a new team, the Office of Regulatory Economics and Market Analysis, which brings together FINRA's Office of the Chief Economist and the Office of Financial Innovation. On this episode, we talk to three leaders from the new group to hear about its mandate and how the new team works to inform FINRA's regulatory policies and programs to advance its mission of investor protection and market integrity.
00:23 – 00:32
Intro Music
00:32 - 01:13
Kaitlyn Kiernan: Welcome to FINRA Unscripted. I'm your host, Kaitlyn Kiernan. I am pleased to welcome back a couple of past guests and one new guest to today's episode introducing FINRA's new Office of Regulatory Economics and Market Analysis. Joining us once again, but in a new role, is Jonathan Sokobin, Executive Vice President and head of REMA, as the new team is known. Also rejoining us is Haime Workie, Vice President of the Office of Financial Innovation, whose voice will be very familiar to those who just listened to our last episode on the Machine-Readable Rulebook. And then joining us for the first time is Lori Walsh, Vice President of the Office of the Chief Economist. Jonathan, Haime and Lori, welcome to the show.
01:14 - 01:15
Haime Workie: Thank you for having us.
01:15 - 01:16
Lori Walsh: Thank you, Kaitlyn.
01:17 - 01:27
Kaitlyn Kiernan: Lori, hopefully we create a good experience for you today and you become a repeat guest. I want to ask each of you to introduce yourselves and tell us a bit more about what you do at FINRA, but Lori as the newcomer, can you kick us off?
01:28 - 02:29
Lori Walsh: Absolutely. Thank you, Kaitlyn. So, I am Vice President and Deputy Chief Economist under Jonathan. And I got to FINRA in 2017, so I've been here almost six years. And in that time, the Office of the Chief Economist has grown from, I want to say, five people when we got here to well over 20 people now, it's just a tremendous team. We've grown substantially. The skills, the staff that we have here are just phenomenal. I, of course, support Jonathan as the Deputy and will step in for him when need be. I also lead our support of Regulatory Operations that I'll talk a little bit more about. My love is Enforcement. I spent 17 years at the SEC, the last seven in the Division of Enforcement. My heart is close to enforcement cases and helping to support those.
02:30 - 02:38
Kaitlyn Kiernan: Great. Thanks, Lori. And Jonathan, so you are in a new role since we last chatted on the show. Can you introduce yourself and your role as well?
02:39 - 03:09
Jonathan Sokobin: Sure. I'm Jonathan Sokobin. I still am the Chief Economist and now the head of this new organization REMA, Regulatory Economics and Market Analysis. And a lot of what we want to do today is talk about what that organization is and what it brings to FINRA, how it helps support FINRA's mission. I'm not going to front run that conversation. My own background is I'm trained as a research economist— I spent time in academics, I spent a lot of time at the SEC, I spent some time at the Treasury Department.
03:10 - 03:18
Kaitlyn Kiernan: And then, Haime, how about you? You just introduced yourself on our last podcast, but what do you do as the head of the Office of Financial Innovation?
03:18 - 03:43
Haime Workie: Sure. Happy to do it again. So, I'm Haime Workie. And as you noted, I head up the Office of Financial Innovation. The office was formed about four years ago, and it's really designed to facilitate innovation in a manner that strengthens FINRA's broader mandate, which is investor protection and market integrity. The issues we cover run the gamut for things like new products and services to fintech-related innovations dealing with artificial intelligence, cloud computing and blockchain technology.
03:44 - 04:08
Kaitlyn Kiernan: Thanks, Haime. And Jonathan, the first time we had you on the show, which was actually one of our very first episodes of FINRA Unscripted, you were introducing us to FINRA's Office of the Chief Economist. Can you walk us through the evolution of that office over the past few years? Lori mentioned it's had some tremendous growth, but how did it become what is now the Office of Regulatory Economics and Market Analysis?
04:09 - 07:58
Jonathan Sokobin: Can you believe it's been almost ten years? It's crazy. When we started this function, it was really about establishing credibility in assessing the economic impacts of rulemaking, and it grew from there. The purpose was to establish that FINRA was really smart in understanding why it needed to take regulatory action, how that regulatory action was going to address a real problem, and then how that regulatory response was going to affect market participants— firms of different sizes, different business models—and ultimately how it was going to lead to the investor protection that was its primary intent.
Since then, we've been doing so much more. And I'll start with OCE, with the Office of the Chief Economist, and I want to say a couple of words about OFI as well. We've been able to use our insights to bring first-of-their-kind enforcement cases. We've provided disciplined assessments that helps us understand the value of large capital investments that are designed to bring new solutions to the industry to help them with compliance. We've become a regular contributor to the strategic sessions at the Board. We lay out the economic conditions and the consequences of the regulatory landscape, so when the Board's discussing things like crypto assets or small firms, we're helping lay the groundwork so that the Board can make better conversation and better decisions in terms of direction. We conduct fundamental research that's coming up with new approaches to rulemaking and supervision, and we work with teams across FINRA to help apply our learnings into the work that they do in policymaking and regulatory operations.
OFI has also been growing in terms of its scope and impact. The ERI function, the Emerging Regulatory Issues function, has been identifying trends in new products and in the development of services in the financial industry that helps us understand where there are new emerging risks, and they work closely with Member Supervision to insert that knowledge so that it has impact on the ground. They're focused on the role of technology, understanding how evolutions in that technology are changing the products that are being available, how the firms do their business, and how investors are interacting with firms. They've taken a step which I think is phenomenal, they've taken leadership in the way that we actually interact with that technology. I know Haime is going to talk about our experience on the blockchain that he and his team have been leading to help us actually understand and evaluate the activity so that we are in a better position to do our job as overseers of activity in the space.
All of this together creates this wonderful opportunity for these two teams. There are some real strong common features of these teams. Both teams focus on qualitative and quantitative analysis, and there's an independence to the function from the operations of the way FINRA works that permits us to ask questions like, 'What's the big picture here? What's changing that we really need to pay attention to? Are we identifying the right information? Are we using the data in a way that's best for helping us understand that problem?' And both teams have, at their core, collaborative processes. Everything we do works hand in hand with other offices and other parts of FINRA and contributes to the overall success of the organization.
07:59 - 08:22
Kaitlyn Kiernan: Thanks, Jonathan. Sounds like both teams are doing really interesting work and it's an exciting opportunity to have the two teams come together in this new group. Lori, I want to focus a little bit more on the Office of the Chief Economist and that program. Jonathan gave a great overview, but can you tell us a little bit more about the primary responsibilities and what the day to day looks like for OCE?
08:23 - 12:32
Lori Walsh: Sure, happy to. So, OCE has three primary functions within FINRA. I would say probably the most prominent and well-known one is our support of the Regulatory Policy program within FINRA. We partner very closely with Office of General Counsel and the policy groups in the business units to evaluate the economic implications of FINRA Rules, both prospectively—so, we're thinking of changing rules or updating rules, what do we believe the potential economic impacts of these changes would be?—and retrospectively, looking at our current set of rules and saying, are they still functioning the way they were intended, do they continue to be needed in the current environment, or have they become outdated or unnecessary?
An example of some of the prospective rulemaking we're currently working on is evaluating a shorter reporting deadline for fixed-income securities. What would the implications of shortening it from 15 minutes to one minute or five minutes be? And what we're really doing is both from an economic perspective understanding the incentives, but also from a data perspective, digging in and saying, okay, what percentage of trades are actually reporting already within one or five minutes? The ones that aren't, what do they look like? Why might they not be? To try to dig into what are the potential costs and benefits associated with shortening the reporting timeframe.
Retrospectively, one of the key reviews we're doing right now is in diversity and inclusion, partnering again with OGC and saying we put out a request for comment, tell us how FINRA Rules and regulations are impacting the industry's ability to manage diversity and inclusion for member firms, and understanding that and seeing if there are changes that we could make to our current rules or new rules that might help improve members' ability to have the diversity and inclusion impact that they want to have and that FINRA encourages them to have.
A second major area is data analysis and research and it's a spectrum, everything from summary statistics of just basic industry data that we like to know. We are the primary contributors for the content on the Industry Snapshot. All the way up through publishing complex academic research in top-tier finance and economics journals and it really runs the gamut.
The driver behind all of our work is to enable FINRA, the industry and other academics to understand the mechanics of the market. How do the mechanics work? How do the incentives in the market work, and how do they ultimately impact our mission, investor protection and market integrity?
I'll give you an example of a research project that we're working on right now that's very interesting. We're doing a deeper dive into private placements and the impact that both private placements and the broker-dealers who participate in private placements have on, for example, investor protection. Are there characteristics or combinations of characteristics that potentially lead to higher risk for investors? And we are partnering closely with Corp Fin. They have their own triage process. They do a bottoms-up approach where they analyze each individual filing and evaluate risk and over time see patterns. We're doing a top-down approach where we're looking cross-sectionally from the top down, and we identify different patterns. And by working together, they can help us inform how we should be looking at the top down. We can help inform them on how they should be looking at the bottom up and have synergies on all sides.
12:33 - 12:50
Kaitlyn Kiernan: That does sound interesting. And on a recent episode about the 2023 Report on FINRA's Examine and Risk Monitoring Program, Michael Solomon, the head of the exam program, said private placements is an area that keeps him up at night, so I'm sure he will be eager to hear more about your research in that area as well.
12:50 - 14:04
Lori Walsh: Yeah, absolutely. The last main area that we focus on, I mentioned earlier, is Regulatory Operations. This is a nascent part of our portfolio, but one that is growing in both impact and importance. And as the Regulatory Operations teams are integrating and coming together and sharing information and working across Reg Ops, we are also trying to have a more structured framework for how we approach our support of Regulatory Operations. So, we help support the Enforcement by examining developing restitution methodologies, calculating ill-gotten gains or customer harm. Helping them think about the right empirical evidence that might provide additional evidentiary support for their allegations. Working with them in settlement to help understanding the trade-offs there. We help support sampling methodologies and help design statistically valid samples for examination and enforcement. So, we're really beefing that area up and we're really excited about the Reg Ops integration itself and how we can best help support that.
14:05 - 14:44
Jonathan Sokobin: I want to go back to the Snapshot for a second because I think it's a great example of how we are able to ask different questions and provide different insights. So, for example, one of the things that we did at one point was try to understand if, let's say, small firms and large firms were actually serving different populations. So, we combine the location of branch offices with a designation of whether that zip code was rural or urban based on Census Bureau information. And we were able to look and see whether branches of large firms and small firms were differently distributed across rural and urban areas. Really interesting.
14:45 - 15:40
Lori Walsh: Each year we try to add new data to the Snapshot. We, just last year, added what we call a Special Topics section for hot topics that we think might be just a one-time addition to the Snapshot. And then we have our traditional groups of data on individual registered reps, data on firms and data on the markets. We're looking to add options data. We're digging more into the CAT data to understand options trading. We are working with Corp Fin on providing more data on the types of corporate filings that we get. And then we also are working on providing more data from FOCUS and understanding net capital, where are firms in their access to net capital and revenue streams and such. So, we're always looking to add new sections.
15:41 - 16:11
Kaitlyn Kiernan: And we can link to last year's report in our show notes. And I believe we usually target the spring for publishing the new report, so our listeners can keep an eye out for that coming up soon. So, thank you, Lori. And then Haime, can you similarly give us an overview of OFI? I think the first time you were on the podcast, it was also known as something different and your team’s also had evolution over time, so it would be great to hear more about the responsibilities and how you got to where you are today.
16:12 - 18:04
Haime Workie: As I previously noted, our overarching mandate is to promote innovation in a responsible way. So, I have an engineering background and I truly believe in the power of innovation to benefit both investors and the markets. And that's part of what really gets me excited about my job. However, it's also important to be aware and to keep in mind that with any new innovation or technology, there's also potentially different types of risks that may get introduced into the marketplace.
If you allow me to digress a little bit, during the height of the COVID pandemic, I took my son and a few of my nephews out camping in the Poconos, and we ended up setting up the campsite, having a little campfire and talking about what we'd do the next day. And there was a lake not too far away from our campsite and we noted we'd probably go swimming the next day. So, I went to sleep thinking that we'd all get up in the morning to do it. But before I even got up, my son and my nephews went over to the lake and started swimming. And being teenage boys, swimming wasn't exciting enough for them, so they wanted to venture off this little cliff that was on the side of the lake. So, one of my nephews just darted off the side of the cliff and jumped into the lake, and they unfortunately had not checked to see what was in the bottom of the lake very well, because he ended up scraping up his legs pretty badly with some rocks. And they're running to me in the morning while I was still groggy and asleep, and they came to me with his bleeding leg, which actually looked worse than it actually was and, fortunately, I had a first aid kit, so I was able to get him bandaged up. But I think what this speaks to, it's great to be excited about something and it's great to have enthusiasm, but you also have to be aware and consider the potential risks that may exist. And in the same way, that's how I'd see the job of OFI, it is to be excited, help the organization see the possibilities of innovation, but then also think about the potential risks that may exist and make sure the marketplace and the market participants are thinking about those risks and we're able to give guidance information around that as well.
18:05 - 18:08
Kaitlyn Kiernan: So, helping the industry and FINRA look before they jump.
18:09 - 18:09
Haime Workie: Exactly.
18:10 - 18:15
Kaitlyn Kiernan: What does the day to day look like for your team? Can you share some examples of the work in action?
18:16 - 19:04
Haime Workie: Well, the day to day really varies. We actually have three groups within OFI. One is the Emerging Trends group, which Jonathan earlier talked about, where we focus broadly on new products and new services that firms are offering. We also have the Innovation Group that's focused more specifically on technology innovations and how they're changing business models, as well as business processes within firms. And most recently, within the past few months, we have opened up a Blockchain Lab that's focused specifically on blockchain and how to develop various regulatory tools, as well as develop a set of expertise in that space for our organization. And the day to day varies along those tracks, but what they all have in common is this idea that we're engaging and collaborating with parties in order to understand new issues and sharing our knowledge and research.
19:05 - 19:13
Kaitlyn Kiernan: Haime and Lori, your teams were separate before, but now they've come together under REMA. How do you work together and collaborate?
19:14 - 20:18
Haime Workie: There's a lot of different ways we collaborate, but I’ll just note that even prior to the formation of REMA, OFI and OCE would frequently collaborate. A good example of this is that we co-sponsored FINRA's Economic Advisory Committee, where we would frequently discuss and address issues involving technology innovations leading to new business models and their implications for regulatory policy, and that would frequently require regulatory analysis about various policy options that we discuss as part of the group.
More recently, OCE and OFI teamed up to develop a risk environmental template for FINRA's Board so that they would be better able to be aware and informed of the economic environment in which you consider relevant risk, including those related to fintech innovations. We looked at things like various margin levels that firms would have for customers to get an idea of the risk appetite that individuals were having in terms of purchasing various products. We also looked at things like volatility in the marketplace, all different types of metrics to get an idea of what was the market landscape in which the risks were occurring.
20:19 - 21:09
Lori Walsh: And I'll just add another example where OFI and OCE have collaborated and it's in our support of enforcement cases. So, we work on enforcement cases where the Enforcement team will ask us to help come up with a restitution methodology for unsuitable or frequent trading in complex products. And Haime's team, particularly Richard Vagnoni, who's a Senior Economist on his team, is very familiar with several of the complex products that we have cases on and so we will work with him. He is able to provide us both context and history into the complex products and we provide the economic intuition, and we work together to support the enforcement case in the restitution and settlement discussions.
21:10 - 21:18
Kaitlyn Kiernan: Thanks, Lori. And Jonathan, how does REMA and the work that we've just heard about fit into the bigger picture at FINRA?
21:19 - 23:45
Jonathan Sokobin: First, before I say that, I have to tell you that Lori and Haime are just incredible professionals. I've tried to hire them more than once in my life, and so having them both working on the team with me is really great. And I think you're hearing a lot of the success stories based upon their leadership and their hard work. You've also heard a ton of stories so far about how the work that we're doing applies directly to a lot of other streams of work across FINRA. The interconnectedness, the commonality between the things that we do and how they relate to the work of other folks—really, really important. Lori talked about Enforcement. We have to have a lot of communication with Enforcement around what they're trying to achieve. They often come to us, as I said before, in cases where they've never actually brought a case. There was a really interesting case where Enforcement had identified an auction of rights and there was abuse manipulation in the auction, but the impact of the manipulation didn't change the price of the auction, the clearing price of the auction, it just affected the distribution of how much different parties were allocated in the auction. So, now the question is, who was harmed? By how much? How do you think about restitution in a case like that?
Haime's talked about the Blockchain Lab. We've been hearing a lot about the cross FINRA efforts to get us in a really good place in terms of how we can effectively supervise, ensure compliance of crypto activities in member firms, and so there is this hub that's been created in Member Supervision. The Blockchain Lab is a key input and partner to the Crypto Hub because they're identifying areas of concern while the Hub is then able to say, well, what are the kinds of technological solutions that exist if you want to try and find wash sales or front running or manipulation in a blockchain?
Those are the ways in which we collaborate. Lori talked about the retrospective rulemaking process. That's something that's homegrown and it really is cutting edge in terms of the way regulators are willing to look back at their rulesets and ask, are they doing what they intended to do? Has the world changed in meaningful ways?
23:46 - 24:12
Haime Workie: Just to add on to what Jonathan said about some of the cutting-edge work that we do, one good example of that involves a recent research and development project where we focused on blockchain technology where OFI, in partnership with FINRA technology, downloaded a node of the Ethereum blockchain, and were looking to develop various tools to help analyze trading activity on the blockchain, as well as developed various preliminary metrics to shed light on the system capacity constraints.
24:13 - 24:34
Kaitlyn Kiernan: Yeah, that is super interesting. Thanks, Haime. It seems like all of this work ties back to FINRA's mission of ensuring investor protection and maintaining market integrity, helping find ways to find manipulation, helping figure out restitution in novel cases that seems to all get back to our mission. But how do you view the work tying back to the mission?
24:36 - 25:23
Jonathan Sokobin: I think you're absolutely right. And we are committed to ensuring that everything that we do does tie back to FINRA's mission. We are regulatory economists and analysts and researchers. What we're interested in is understanding, in the case of the rule making portfolio, how FINRA can best position itself so that our rules are going to be effective, they're going to actually meet their intended goals, that investors are going to be protected. In the strategic work we're doing with the Board, we're helping them be more and better informed in their conversations so that FINRA can position itself appropriately for the protection of investors and ensuring well-functioning markets. Everything we do plugs in directly to the work of FINRA across its mission.
25:24 - 25:39
Kaitlyn Kiernan: Thanks, Jonathan. Just to wrap up, I wanted to ask you each in turn what you're most excited about when it comes to the creation of REMA and the opportunities for your teams in the months ahead. Lori, can we start with you?
25:40 - 26:22
Lori Walsh: Sure. As Haime mentioned, OFI and OCE previously worked together in an ad hoc way. I am very excited about having us under the same umbrella. We tend to look at the same issues just from different perspectives, and by pulling them together, we end up having a much clearer insight and being able to provide those insights to FINRA generally. One of the things I'm most excited about is just the combination really elevates the work product that each team puts out and is together much more valuable to FINRA and the industry broadly.
26:23 - 26:25
Kaitlyn Kiernan: Thanks, Lori. And Haime, how about you?
26:26 - 26:49
Haime Workie: We recently had an offsite. We were able to get the entire REMA team together and given the number of new staff, I met many of the people for the first time and had an opportunity to learn about their background and some of their professional areas of expertise. So, what I'm really excited about is getting to work with and collaborate with such an incredibly talented and diverse group of individuals as we seek to collectively further FINRA's mission.
26:50 - 26:53
Kaitlyn Kiernan: Thanks, Haime. And then, Jonathan, I'll give you the last word.
26:54 - 28:44
Jonathan Sokobin: There's so much that I'm excited about. The ability to work with such talented and committed professionals across these two organizations to create a unit whose goal is to make FINRA better, to ask the questions and help inform decision makers across the spectrum of what FINRA does, to bring a slightly different perspective—if you turned a problem on its side, would it look different? And how does that help us understand how to make FINRA efficient and effective for purposes of protecting investors and ensuring well-functioning markets? This function has so much potential to contribute to the overall direction that FINRA takes across its business. Thinking differently about how the tools we provide firms for compliance actually helps them and being able to capture those benefits, being able to talk about the blockchain and technology and the metaverse in the way that Haime has, to be able to understand how firms use of behavioral techniques affects the experience of investors. We haven't even talked about the fact that the OFI and OCE teams piloted with Member Supervision and OGC and others the first time, that I understand, any financial regulator in the United States had its staff directly interacting with firm apps in order to understand how it affected outcomes for investors. These are the kinds of cutting-edge opportunities that a group like this can participate in and contribute to, and that I think will ultimately lead FINRA to even more effectiveness in meeting our goals.
28:45 - 29:15
Kaitlyn Kiernan: Yes, that sounds like there's just a lot of opportunity ahead. So, excited to see what's in the future for the Office of Regulatory Economics and Market Analysis. That's it for today's episode of FINRA Unscripted. Lori, Haime and Jonathan, thank you so much for joining me. You all have a lot on your plates, but I'm sure we'll be hearing more about the work of your team soon. Listeners, if you don't already, you can subscribe to FINRA Unscripted, wherever you listen to podcasts, and you can always stay up to date on our latest episodes that way.
29:15 - 29:30
Kaitlyn Kiernan: If you have anything you'd like to hear about on a future episode, you can email us at [email protected]. Today's episode was produced by me, Kaitlyn Kiernan, coordinated by Hannah Krobock and engineered by John Williams. And a special thanks to Heather Seidel.
26:29 – 26:34
Outro Music
29:36 - 30:03
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