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FINRA Chief Cook Welcomes BD, Advisor Regulatory Review

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Feedback received during Robert Cook’s listening tour during his first year as CEO of the Financial Industry Regulatory Authority has prompted the launch of FINRA360, which Cook called “a comprehensive organizational improvement initiative to take a fresh look” at the self-regulator’s operations.

Cook discussed the launch of the nascent program during a Friday speech at Columbia Law School, where securities regulators, practitioners and regulators convened to start the first phase of a multiyear project — the New Special Study of the Securities Markets — that seeks to chart a “bold new vision for regulatory reform.”

Cook said that he also welcomed the study’s probing of the “overall balance” of regulation between broker-dealers and investment advisors, and “what implications are there for both [self-regulatory organization] regulation of broker-dealers and for examination and oversight of investment advisors?”

Since being named head of FINRA last June, Cook told attendees that his listening tour “has generated valuable feedback, most of it focused on how FINRA performs its day-to-day regulatory operations. And we are acting on this feedback,” he said, noting that part of the goal is to ensure FINRA is “optimally organized and managed to achieve our mission.”

The listening tour, Cook said, “has also revealed broader questions from some about what self-regulation should look like today. As a membership organization, we must be open to a conversation with our members about these questions, and other perspectives must be part of the dialogue as well.”

FINRA, he continued, “must be willing to consider any changes that will better serve the interests of investors while promoting strong and vibrant capital markets. Your input would help us do that.”

Cook highlighted FINRA’s March 21 request for comment on the effectiveness of its “extensive committee structure,” which includes advisory committees, district committees, and ad hoc committees “that play an important substantive role in the development of rules and other initiatives by, among other things, providing feedback to proposals and identifying emerging regulatory concerns.”

The 30-page notice zeroes in on FINRA’s advisory and ad hoc committees, rulemaking process, member relations programs, and the information it provides regarding its programs and operations.

More special notices requesting comment on other aspects of FINRA’s operations will follow, Cook noted.  

He also invited scrutiny of the SRO model, welcoming “the conversation,” for one reason being that he’s “confident that a thoughtful review will ultimately validate the compelling benefits of self-regulation as embodied in FINRA.”

However, he added, he invites the discussion to seek “opportunities for FINRA to improve,” adding that the FINRA360 initiative was launched “for exactly that reason: to identify ways to make FINRA better – more thoughtful, more efficient, and more effective. This effort depends on ongoing, meaningful engagement with our members, with investors, and with the full range of our stakeholders.”

Does FINRA’s structure today “strike the optimal balance between the benefits of active industry participation in regulatory decisions and our obligation to protect the investing public as a vigilant regulator?” Cook asked.

Before answering the question, Cook said, “it is important to understand FINRA’s current structure, which has been re-engineered over time based on studied consideration involving not only FINRA’s Board of Governors, but also Congress, the SEC and our own members.”

The various elements of this structure, he continued, “create a system of checks and balances intended to enable member participation in regulation while limiting the extent of industry control over FINRA’s operations.”

Central to this structure, he continued, “are several channels for engagement with the industry, starting at the top.”

FINRA’s Board has “substantial industry representation that cuts across all firm sizes,” he noted.

FINRA announced that it will conduct a special meeting of large member firms around May 19 to elect one individual to fill a vacant large firm governor seat on the FINRA Board.

“Excluding the CEO, industry governors constitute 45% of the Board. This structure was voted on and approved by FINRA’s members in 2007, when FINRA was created from the consolidation of the member regulatory functions of the [National Association of Securities Dealers] and the [New York Stock Exchange].”

Cook stressed that “some have incorrectly suggested that this merger marked the end of the era of ‘true SROs’ – by which they apparently mean SROs that were predominantly governed by their members.”

In fact, however, he argued, “the merger did not represent a fundamental change in governance. For at least 10 years before the consolidation, the NASD had a majority of non-industry governors. And all of the directors of the Board of NYSE Regulation, with the exception of its CEO, were independent.”

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