Finra touts improvements during first year of Finra 360 operational review

Critics say the changes so far don't go far enough.

More than a year into Finra’s self-examination initiative, CEO Robert W. Cook is touting many incremental successes in improving the broker-dealer self-regulator’s operations.

But the biggest breakthrough, in his view, is the way the organization has taken Finra 360 to heart.

“The big-picture success of the year has been to launch this ongoing continuous improvement exercise and to see it embraced eagerly by all our employees,” Mr. Cook said in an interview.

The Financial Industry Regulatory Authority Inc. released on Tuesday a 40-page progress report on Finra 360, which kicked off in March 2017. The project, along with a “listening tour” consisting of meetings with Finra member firms, industry officials, investor advocates and other regulators, has defined Mr. Cook’s agenda since he took office in August 2016.

Among other Finra 360 advances, the progress report highlights the streamlining and restructuring of Finra’s enforcement program; the release of the first Finra budget summary and financial guiding principles; the release of the first exam findings; the launch of a small-firm helpline; and the increased transparency of Finra’s advisory and governing committees.

The changes that have been made so far are incremental. For instance, critics want the Finra board meetings to be open to the public. The regulator hasn’t gone that far yet.

“What you see in the progress report are areas that we’ve identified where…it’s more low-hanging fruit, things we can readily implement and we think are very meaningful,” Mr. Cook said of the governance changes.

Overall, Finra is trying to make reforms without undermining its role as a market police force.

“We’re finding ways that we can reduce burdens on firms without reducing investor protection or sometimes increasing investor protection without increasing burdens on firms,” Mr. Cook said.

Mr. Cook is trying to change an industry-funded regulator that oversees approximately 3,700 brokerage firms and 630,000 registered representatives with a staff of more than 3,500.

Over the years, Finra has been criticized by member firms and others for being heavy-handed, opaque and operating largely on its own despite oversight by the Securities and Exchange Commission — accusations that were explored in an in-depth InvestmentNews report and a congressional hearing last fall.

Mr. Cook has received widespread praise for his efforts to reform Finra, which was created in 2007 by the merger of the National Association of Securities Dealers and the enforcement arm of the New York Stock Exchange.

“As part of the Finra 360 initiative, Robert Cook has introduced an outsized amount of increased transparency into Finra operations that have allowed members to fully understand how Finra works,” said Christopher Iacovella, CEO of the Equity Dealers of America, a trade association comprised of middle-market broker-dealers. “If the previous administration was a black box, this administration is a fish bowl.”

Dale Brown, president and chief executive of the Financial Services Institute, a trade association for independent broker-dealers and financial advisers, also complimented Finra 360.

“We appreciate Finra’s willingness to meet with us and our members to learn from the industry’s experiences with Finra, real-world application of regulations and their daily interactions with Main Street investors,” Mr. Brown said in a statement. “It is evident that Finra has taken the feedback it received into serious consideration and is making significant changes to enhance transparency, improve oversight and obtain better results without impacting their main mission of investor protection.

But one vocal Finra critic wants the organization to reach beyond the low-hanging fruit.

“We’re at the point where they need to actually start making substantive changes rather than just talking about change,” said David Burton, senior fellow in economic policy at the Heritage Foundation.

He points to the small-firm hotline as an example.

“That may help, but it’s not a dramatic reform,” Mr. Burton said. “That’s not going to make a major difference. It’s small-bore.”

Mr. Cook stresses that “there’s more to come” with Finra 360, which he said will last a couple of years.

“If people think anything we’ve done doesn’t go far enough or there’s more we can do, I’m all ears,” Mr. Cook said. “I’m eager for feedback.”

Investor advocates are likely watching Finra 360 closely to monitor whether the industry gains too much influence in the self-regulatory organization and dominates rule-making and enforcement.

Mr. Cook said that Finra is held in check by its majority-public board and by the SEC.

“That’s a counterpoint to industry control and management-control of the organization,” he said. “Most importantly, we have extensive SEC oversight of our activities.”

InvestmentNews will continue to explore Finra 360 in an April 30 cover story.