InvestmentNews Editorials

A pat on the back for progress, but Finra has a long way to go

Regulator has chalked up some welcome changes, but the work is not done

Apr 28, 2018 @ 6:00 am

A​ year after launching a top-to-bottom review of its operations, called Finra 360, the Financial Industry Regulatory Authority Inc. last week issued a 40-page progress report. As far as these types of assessments go, it is fairly typical and predictable: The report highlights changes, some of which Finra's new chief executive Robert W. Cook himself describes as "low-hanging fruit," and promises more to come in the way of meaningful reforms.

Mr. Cook is getting high marks from some in the industry for Finra 360 and the listening tour he embarked on shortly after taking office in August 2016. That is also predictable, given that under previous leadership, Finra was routinely criticized for its heavy-handed approach to regulation and lack of transparency in operations and financial reporting. Mr. Cook's harshest critics say he still has a long way to go to making the organization less opaque and more responsive to its broker-dealer members and the investing public.

(More: One year later, is Finra 360 working?)

But the biggest flaw in Finra 360 is a fundamental one. Self-assessment and correction may be fine for individuals who want to improve their lives, but it doesn't work for organizations such as corporations, government agencies — or self-regulatory organizataions. "Finra 360" may have a nice ring to it, but it would have been far better to have hired an outside consultant to conduct this efficiency review and make recommendations on how to improve operations. Even under the best of circumstances, Finra 360 will be tainted by the fact that it is an internal effort. People will always second-guess whether the organization went as far as it could in assessing its shortcomings and instituting improvements. Hiring an objective, third-party expert would have been a better way to achieve buy-in from both its members and the investing public it professes to protect.

Accomplishments so far

That said, what has Finra 360 achieved to date? Among the changes Mr. Cook highlighted, a few things stand out. One is an effort to enhance the examination process by continuing to monitor and focus more on high-risk firms, improving the training of examiners and issuing annual reports to member firms that provide feedback on problem areas that recent exams have uncovered. Finra also has established a telephone helpline designed to communicate better with smaller broker-dealers.

Mr. Cook also pointed to a budget summary that Finra issued for the first time in January that discussed anticipated revenue and expenses for the upcoming year. A lack of transparency in accounting for the hundreds of millions of dollars Finra takes in each year in membership fees, and especially fines, has been an ongoing criticism of the regulatory agency. The budget summary did little to satisfy the critics. "It's a year into the [Finra 360] initiative, and we still have no idea where the fine money is going," Andrew Stoltmann, a securities attorney and president of the Public Investors Arbitration Association, told Mr. Schoeff.

Mr. Cook has promised to reveal how Finra spends its fine money this summer.

One area where Finra has made little progress is in revamping its board meetings. Unlike most government agencies, including the Securities and Exchange Commission, Finra's board meets behind closed doors away from the oversight of its members and the general public. Although Finra has begun posting more information online about its meetings, that doesn't come close to satisfying the need for transparency that comes with open meetings.

On the whole, Finra's critics are right. The agency has made some fruitful first steps, but the real work is yet to be done. Hopefully, its next report will show more meaningful progress.


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