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PODCAST

Introducing Stephanie Dumont

July 13, 2021

FINRA’s Market Regulation and Transparency Services department sits at the center of the U.S. securities markets, conducting ongoing oversight within and across markets and providing transparency to help investors make informed decisions.

On this episode, we meet Stephanie Dumont, the new head of FINRA’s Market Regulation and Transparency Services department. Stephanie shares her priorities, her vision for the department, and how FINRA is responding to recent market events.

Resources mentioned in this episode:

Market Transparency Reporting Tools

TRACE Treasury Aggregate Statistics

Listen and subscribe to our podcast on Apple Podcasts, Spotify 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 – 00:19

Ray Pellecchia: In March, Stephanie Dumont became the new executive vice president of FINRA's Market Regulation and Transparency Services department. Today, we sit down with Stephanie to hear her vision for the department, the priorities she's focused on and how FINRA is responding to recent market events.

00:19 – 00:28

Intro Music

00:28 – 00:47

Ray Pellecchia: Welcome to FINRA Unscripted. I'm your guest host, Ray Pellecchia. Kaitlyn is taking some time off. Today, I'm pleased to welcome to the show for the first time, Stephanie Dumont, FINRA's new executive vice president of Market Regulation and Transparency Services. Stephanie, thanks for joining us.

00:47 – 00:49

Stephanie Dumont: Hi, Ray. It's great to be here.

00:50 - 01:08

Ray Pellecchia: Stephanie, in March, you were promoted to executive VP and head of Market Reg and Transparency Services after serving for years as senior VP and director of Capital Markets Policy in FINRA's Office of General Counsel. Can you start us off by telling us a little bit about your background?

01:09 - 01:29

Stephanie Dumont: I am actually born and raised in the Northern Virginia area. I went to University of Virginia undergrad. I was a finance major there, and I went to University of Virginia Law School. I did get my LLM in securities from Georgetown University Law Center. But I am born and raised in the Washington, D.C. area.

01:30 - 01:32

Ray Pellecchia: And then where did you start your career?

01:32 - 02:14

Ray Pellecchia: I actually started my career right out of law school in the early 90s. Please don't do the math. At NASD, which was the predecessor of FINRA, as many of you may know. And I started my career as an investigator in Market Regulation. So, at that point, right out of law school, I was weighing, do I want to go work for a law firm or do I want to take on a career in the securities enforcement side? And a mentor had advised me that if I wanted to get hands on and unique experience, this role at NASD was a great opportunity and they were definitely right.

02:14 - 02:18

Ray Pellecchia: And that's how you ended up specializing in capital markets?

02:19 - 03:25

Stephanie Dumont: That is right. It was a very trading focused job. And it was amazing because you really got to basically every day go into the office and solve puzzles. And you were really on the front lines for a job that was right out of law school. We were calling up traders every day asking them about their trading if we'd seen some unusual or aberrant activity.

I did a lot of insider trading, fraud investigations, short selling was a big focus back then, and we actually started a specialized group for short selling, which still exists today. We also got to spend time on stock watch. It was required part of the job to sit on the stock watch desk. And so that was very exciting, but stressful. I remember the first time I had to push the buttons to halt a stock back then. So that was definitely a unique opportunity to work on the stock watch at the time. And you really get a taste for the trading side of the world and you either love it or hate it. And I absolutely loved it.

03:26 - 03:33

Ray Pellecchia: That's a very cool start. How do you think those earlier experiences prepared you, if at all, for your current role?

03:34 - 05:02

Stephanie Dumont: They absolutely did. So, I worked in Market Reg for about four years, and then I went to a compliance consulting firm, which was a great experience as well. I was helping the firms out with their compliance programs, building them and improving them. But it was more on the sales practice side of the securities laws. So, I definitely missed the trading side of the world and the trading rules in that area.

So, a position opened up in the Office of General Counsel. And so, I thought this would be a great opportunity as well to try and do some of the policy side and rulemaking. That was in 1999, and that was actually around the same time that the dot com focused. There was a lot of volatility, lots of retail order flow interest, day trading was a big issue. And actually, there's a lot of parallels with the recent meme stock activity that's been happening now. We see these trends.

So, it was very active at that time from a regulatory and policy perspective on the trading side of the world. Mary Shapiro was testifying on day trading. We got to work really closely with the Nasdaq folks who were part of NASD at the time. So, it was a great opportunity then too to really get to focus on the trading policy and rulemaking side of NASD.

05:04 - 05:19

Ray Pellecchia: And then fast forward to the time when you were director of Capital Markets Policy and senior VP in the Office of General Counsel. When you were in that role, how did you work with the Market Regulation and Transparency Services team?

05:20 - 05:43

Stephanie Dumont: It was definitely a great partnership between Market Reg and Transparency Services. I think given that I had worked in the Market Reg department, I think I knew how challenging their jobs were and how the rules interact with their day to day job. We got to work very closely on a lot of different initiatives and it really was a great partnership.

05:44 - 05:53

Ray Pellecchia: Now, for those who are less familiar with FINRA, can you tell us a little bit about the key roles and responsibilities of Market Reg and Transparency Services?

05:54 - 08:41

Stephanie Dumont: Yes, absolutely. They do amazing work. There's about 650 employees and they're spread across the country, but primarily in Rockville, New York and Chicago.

And just the basics - the department conducts extensive oversight in equities, options and the fixed income markets. Our surveillance assesses billions of market events each day. We look for manipulation, fraud, compliance with short selling rules, trading and order handling rules. And I should say, when I say billions, it truly is billions of market events. We get 250 on average market events per day, and at its peak it's really been as high as 400 billion and beyond events in one day. And if you put that in context to other industries, it's more than Twitter, Visa, PayPal, Facebook, all of those combined. So just the amount of data that flows into our system is incredible.

And so what we overlay on that data are surveillance patterns. And we have over 120 surveillance patterns that cover the equities, fixed income and options area and cross-product patterns. And there's 250 threat scenarios that drive those 120 plus different patterns. So that's the surveillance side of the department.

Now that's coupled with examinations. So, we have trading and execution examination area of the member firms and both inform each other so that we have a more holistic, comprehensive look and we work closely with Member Supervision on their exam program as well. And so, we have these inputs and data points from both the surveillance and the examinations to fulfill our overall regulatory responsibilities.

And then we have the transparency side of the department, Transparency Services, and they, as the name implies, they bring transparency to the equity and bond markets, and they really play such an important role in making sure that investors can make informed investment decisions and that we as regulators have the information that we need.

And so, under Transparency Services, there's a number of different facilities that we operate and they create the foundation of our audit trail. And you've probably heard of these facilities, but TRACE (Trade Reporting and Compliance Engine), that's our fixed income platform. And then we have a number of equity platforms, the trade reporting facilities that we partner with Nasdaq and New York Stock Exchange on. We have the Alternative Display Facility or ADF, and then we have the over the counter reporting facility, which is the unlisted equities facility.

08:43 - 08:49

Ray Pellecchia: Now, I know you've only been in office a few months, but have you developed a vision for the future of this department?

08:51 - 11:54

Stephanie Dumont: I definitely have a very ambitious vision, a couple of areas of focus.

Certainly one of them is to continue our critical central role in the cross-market oversight. We already talked about our surveillance, but that is something we are really focused on, is that we continue to be best in class on our surveillance and our technology. And we have an amazing team in Market Reg and Technology that is constantly focused on that. It's an information loop. We have our surveillance and our outputs and we continue to always look at that and see what we have and how we can enhance the quality of that and continue to be even better.

Given this quantity of data that I talked about, the 250 billion market events, we moved to cloud computing and we're constantly experimenting with other things we can do, development, improving our techniques, improving the tools that we have. We have an organization-wide research and development program that is also constantly evaluating and testing these new techniques. They are really at the forefront of market surveillance and artificial intelligence, machine learning and deep learning. We tap other experts outside of FINRA, academics, others that will make sure that we are up to speed and on the cutting edge of surveillance techniques and advances.

Another area is transparency, and we're always continuously thinking about ways we can bring more transparency to investors, to the markets, to regulators. So that is always part of the future vision is, how we can be providing more information, more transparency.

And then enterprise-wide, a big priority and strategic goal is to really continue to focus on efficient and integrated regulatory operations. So that's not just Market Reg, but that's Member Supervision and Enforcement, and really looking to see how we can continue to have an integrated end to end lifecycle of a matter. So, when something is identified, whether it's an alert or a complaint as it moves along within FINRA to investigation or enforcement, we want that whole process to be integrated and make sure that we are collaborating and communicating.

And that's not just benefiting FINRA. Of course, we want to be as efficient and effective as possible, but it also is beneficial to the firms to have a more integrated FINRA. So I've been working closely with the head of Member Supervision, Bari Havlik, and our head of Enforcement, Jessica Hopper. We meet regularly. This is an area we're very focused on making sure that we are creating and maintaining an environment where there's collaboration, communication across the Reg Ops department.

11:55 - 12:16

Ray Pellecchia: Well, you were right. That's an ambitious agenda, as it should be. Let me ask about one of your specific programs. Market Regulation has been working on something called rapid remediation. What is rapid remediation? How do you say it better than I just said it? And how does it protect investors and help firms achieve compliance?

12:17 - 13:45

Stephanie Dumont: Rapid remediation - It's just such a great program. In basic terms, it's a way that we, as the name implies, it's a way that we can more quickly use the information that we see on what firms may be doing as far as compliance with the rules and getting that information in their hands that they can go back and look and hopefully if there is an issue, they can fix that more promptly.

So, this is complementary, in a sense, to our report cards, which we send out to firms regularly so that they can see how they're doing, maybe identify potential issues for them. But we do this weekly or monthly. We do it in the equity space and the fixed income space.

And once we identify something, we immediately reach out and we highlight that activity for the firms and then we have a dialogue with the firm and ensure that they are looking into it. And if it is an issue that they are proactively working on it, addressing it, correcting it, the sooner that they can identify it and correct it, the better it is for them. And it's also better for us and the markets, because especially if it's, say, a trade reporting issue or an audit trail issue, the sooner that that can get corrected, the better it is for our program as well. It's been a huge success. It has led to overall, higher compliance rates across the industry.

13:46 - 13:50

Ray Pellecchia: Stephanie, what do you see as the biggest strength of your group?

13:52 - 14:32

Stephanie Dumont: Absolutely, expertise of the group is incredible, they are so well versed in so many different subject areas within Market Reg and the trading issues, their expertise is amazing. The dedication as well is incredible. They are very dedicated to the mission. And I think we all wake up every day and we are focused on investor protection, market integrity. Incredible work ethic. And I would say enthusiasm and curiosity are also big strengths of the department. And it really shows in everything they do every day.

14:34 - 14:38

Ray Pellecchia: And on the other side, where are the greatest opportunities for improvement?

14:39 - 15:16

Stephanie Dumont: That's a great question. I think that we never stand still, we don't think, OK, we've got it now and we don't need to keep looking for the future and how we can be even better and making sure we're creating a culture where we're supporting and promoting thinking innovatively and always thinking about what more can we do. That's really important for the department. We're very data driven, as I talked about, and I think we should always be looking for more opportunities to continue to be better, whether it's capturing more data, whether it's surveillance and other ways we can be even better.

15:17 - 15:29

Ray Pellecchia: Just a bit ago, you mentioned our mission and our work. In recent months, there has been some extraordinary market activity. What is Market Reg's role when it comes to such events?

15:30 - 16:39

Stephanie Dumont: It has been definitely an interesting past couple of months with all the volatility and the market events. And Market Reg has a number of different roles I think they play when these kinds of events happen.

Immediately, they are focused on the trading data and recreating the market events and understanding what was driving the activity. And it's a very collaborative process when these types of events happen, not only across the organization, with all of the department, but we also work really closely with the SEC and our exchange partners when these types of events happen and make sure we're sharing information and being able to work closely and to understand what happened, what was driving the conduct.

And then, of course, we also have our surveillance that the alerts that are produced based on the market activity. And so, I can say the volatility and the increased volume, the number of alerts increased dramatically during that time period. So we are, of course, reviewing and analyzing all the output of our surveillance.

16:40 - 16:53

Ray Pellecchia: Our president and CEO Robert Cook recently testified that some matters are under investigation. But apart from those, what outcomes might we expect in terms of changes in rules or policies?

16:55 - 17:54

Stephanie Dumont: Well, we've already put out a number of Notices that I think are hopefully helpful for firms to provide guidance, but we've also solicited comment on some particular areas like short sale areas. So, you can expect, of course, when we put out a notice soliciting comment, that's an area we're thinking about potential changes to. So short selling is one of those areas.

We also put out guidance around options. We also put out guidance about Best Ex and Payment for Order Flow. So those are certainly areas that have been important but came into particular focus with the recent market volatility.

And of course, Chair Gensler announced a number of key focus areas by the SEC, gamification, equity market structure, Payment for Order Flow, the Treasury markets. And we, of course, are looking forward to the leadership in those areas and we're happy to support their efforts as appropriate.

17:55 - 18:13

Ray Pellecchia: Now, flipping over to the transparency side, at the recommendation of the Treasury Department and the Federal Reserve, FINRA has been providing greater transparency in the trading of Treasury securities, the world's largest market. Can you give us an overview of what changes have taken place?

18:13 - 19:55

Stephanie Dumont: Yes, absolutely. It's amazing to me that just a few years ago, there was not a centralized regulatory audit trail for Treasuries. So, so much incredible work has been done in that area.

So, just a little bit of background. The Interagency Working Group, which is, as you said, Treasury, SEC, the Fed, they recommended a number of years ago that FINRA require their firms to report transactions in Treasuries for regulatory purposes only. So, we have been capturing that data for regulatory purposes, and we provide it to the federal regulators. And we also use that for our regulatory program and our surveillance and oversight.

But it's not 100% complete because it does only apply to FINRA members. So, there's some gaps in that information. And primarily it is the banks that are not FINRA members. To close that gap, the Fed earlier this year solicited comment on a proposal that would require the banks to report their transactions in Treasury securities. And the way that rulemaking approaches it is they would report it to FINRA. We would be operating as a vendor in that space. So we were very excited and encouraged by the rulemaking. The comment period expired, there were a couple of comment letters that came in. And so we're hopeful that the Fed will adopt those requirements and we look forward to supporting the Fed if it does get approved. So then once that reporting gets in place, if it does move forward, we would have a more complete audit trail for the Treasury market.

19:56 - 20:02

Ray Pellecchia: And is that the purpose of all this, that the reporting helps regulators understand the market and protect investors?

20:03 - 20:05

Stephanie Dumont: Yes, that's exactly right.

20:06 - 20:08

Ray Pellecchia: Where can investors go for this new information?

20:09 - 20:31

Stephanie Dumont: Well, the regulatory audit trail is not disseminated yet. It is only for regulatory purposes. But FINRA does provide aggregate monthly statistics on our website. So, if you're interested in seeing some of the volume numbers and more statistics around Treasury reporting and trading, you can access that on our website.

20:33 - 20:40

Ray Pellecchia: Speaking of large projects, I have to mention the Consolidated Audit Trail. What's the latest on the CAT?

20:41 - 22:54

Stephanie Dumont: So that is a very significant initiative that not only we have been working on here at FINRA, but all the SROs, exchanges, FINRA CAT, and the industry, along with the SEC, have been working very hard over the past couple of years on CAT, the Consolidated Audit Trail. And a big milestone happened back in April. It brought in large trader ID information. So with that, we've been very focused on CAT from a number of vantage points.

We've been building out our CAT compliance program, so we've been reviewing the quality of data. We've also been, with this new data set, we've been transitioning and enhancing our patterns to use CAT data. And with that, one of the goals of CAT was to retire duplicative systems. And OATS, the Order Audit Trail System, was one of those systems and we just announced that we are going to retire OATS on September 1. So that was a big milestone as well, to be able to feel comfortable with the CAT data that it's been meeting all the objectives, error rates, and also ensuring that our surveillance output is working well with the CAT data.

So we have seen already a number of benefits with the CAT data, particularly with the recent activity, the meme stock-related volatility, we saw a number of benefits with the CAT data. Options is a huge game changer for us as far as the data that we get in CAT includes order level information about options, so before it hits the exchange. And that had never been captured before in our consolidated audit trail form.

The CAT also has a firm designated ID or FDID and that allows us to track specific accounts at a firm across multiple products and days. And then, as I mentioned in April, we began capturing large trader ID information, and that also is going to enhance our data set significantly and it will provide us even more expanded regulatory capabilities.

22:55 - 23:03

Ray Pellecchia: Excellent. Let me ask one last question, Stephanie. You're a few months into this new role. What do you think so far? 

23:03 - 23:42

Stephanie Dumont: it's been great. I'm learning so much and I really do feel privileged every day to have this opportunity to play such an important role in furthering investor protection, supporting the integrity of the US markets, which are truly the greatest in the world. I started my career here in Market Reg and I have gone full circle in a sense, now that I'm back in the department. And it's just been an incredible journey for me. And I'm really enjoying this new role and working closely with the amazing team in Market Reg and Transparency Services. Again, it's really a privilege.

23:43 - 24:12

Ray Pellecchia: Well, that's it for today's episode of FINRA Unscripted. Stephanie, thanks so much for joining us to introduce yourself. We're going to take a break, but we'll be back with new episodes and new guest hosts in September. We hope you enjoy the rest of your summer. If you don't already, listeners can subscribe to FINRA Unscripted wherever you listen to podcasts. If you have an idea for a future episode, you can email us at [email protected] Until next time.

24:12 – 24:17

Outro Music

24:17 - 24:40

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