Transcripts For CSPAN3 Financial Industry Regulatory Authority 20171006

See certain the Congressional Black Caucus foundation discussion is available on cspan. Org. Well leave this and take you to a discussion in washington on financial regulations and their role in the u. S. Economy. Youll hear from robert cook, president and chief executive officer of the financial industry regulatory authority. Live coverage here on cspan3. Robert and i talking about developments. Were going to have you, the audience, become part of the discussion. Let me take a minute or two to discuss or frame our discussion and then introduce robert. A regulator of central importance although not widely understood and a lot of people dont know a lot of things about it. It is commonly called a Self Regulatory Organization or sro. Its a delaware not for profit corporation. It is not a Government Agency. Yet, it is important in terms of its size and scope. It has a budget of approximately 1 billion which compares to the s. E. C. s budget of 1. 6 billion. It has approximately 3,500 employees compared to the s. E. C. s 4,300. So its budget is about twothirds that of the s. E. C. And employee count is 80 . Regulates broker dealers and has a strong role in the regulation of stock exchanges. It was originally formed when the New York Stock Exchange became private for profit stock exchanges and the regulatory functions of those two exchanges were merged and that became finra. It plays an Important Role in terms of disciplining bad actors in the broker dealer community. It imposes fines. It can bar from individuals from participating in the industry. Robert cook became ceo a little over a year ago. He has in my judgment done the right things. He undertook a listening tour all over the country with all different kinds of constituencies and many times he went without an entourage unlike a lot of people in his position. So he could get frank and honest input from people without having to worry how that might be taken back among the staff. He also has lost a program were going to talk about a fair amount today called finra 360 which is meant to be a comprehensive review of what it does and how it might be reformed. I suppose its no secret that i believe that some reforms are appropriate and i dont want to put words in roberts mouth but it seems to me that his listening tour and undertaking this shows that he believes theres at least some room for improvement there as well. I also think theres a renewed interest. The s. E. C. Has stood up a new office to engage in finra and other oversight and the Committee Held the first hearing in a very long time and just today the Treasury Department released a report which i recommend you look at which discusses sros including finra and specifically calling it out for praise in terms of its finra 360 initiative. Let me introduce our guest. Robert cook is the president and ceo of finra, a position he assumed 14 months ago. Also chairman of the finra Investor Education foundation. He had previously served from 2010 to 2013 as the head of the division of trading and markets at the s. E. C. The division is responsible for a wide variety of things including the oversight of broker dealers. Prior to his service at the s. E. C. And now at finra both in between those he was a partner that clearly got a lot of steam in hamilton and during his private practice focused extensively on broker dealer regulation. He has a jd from harvard and undergraduate degree from harvard and a masters from the London School of economics. With that, lets get started. I first wanted to ask you a question about hows the job and is there anything that you found surprising or was different than you anticipated . Well, first let me start by thanking you david for the opportunity to be here and thank you to the Heritage Foundation for this event and thanks to all of you for coming and your interest in this and i look forward to later having an opportunity to address your questions. Ive been in the job about 14 months as you have said. Its been a wonderful learning experience for me to learn more about finra but what has been especially interesting for me has been as you mentioned listening tour to learn a lot about our stakeholders and members in particular to hear their thoughts which i know well be talking more about as we proceed. And to hear their support in many ways for self regulation and for a model of self regulation and interest and engaging with us as we pursue the finra. As i mentioned, we have Different Levels of understanding of finra in our audience both here and on the web. Lets start with the basic question. What is finra and what does it do. Well, you could think of it as the frontline regulator of the broker exchange. About 3800 firms. 600,000 registered retches and finra is the primary [ inaudible ] anybody who wants to be in the Brokerage Firm has to be a member. It has continuing education requirements for individual brokers and then they need to comply with our rules that we write and are adopted pursuant to s. E. C. Approvals. We conduct examinations, thousands of examinations every year to make sure firms are complying with the rules and the s. E. C. s rules and we also then bring proceedings where thats appropriate. Our focus, we have a role to play in the oversight of the trading and Securities Markets through contracts with the exchanges. We pull in data of about 99 of the equity trading and about 60 fkt or so of options trading and we surveil that data to look for anomalies or patterns and pursue those through examination and proceedings on our own part or on behalf of the securities exchanges as appropriate. We also operate certain utilities in the markets. So we operate some trade reporting facilities, one that you may have heard of is trace which is a trade reporting facility for fixed income and that was expanded to cover treasury instruments this last july. For the first time we have reporting for regulatory purposes of all transactions in treasury securities which is deepest and the most liquid market in the world. So we operate utilities like that, provide our members with compliance tools. To help them comply with the rules whether its education or compliance templates or report cards or other things that give them information that will help them comply with the rules. Another important function we perform is education of investors and since this is world investor week i would be remiss if i didnt make a plug for Investor Education. We together with the s. E. C. And the cftc and the state regulators issued an alert this week available on our website or the s. E. C. s website, investor doufl a if youre an investor and have a complaint or concern about a broker dealer, how would you interact with finra, how would you seek to work with them to resolve the problem . There are a couple ways. You might we have a tips and complaints line. So you might call that up. And share your concerns and then we would follow up on that. We have a whistle blower line so if you see concerns about whats happening in the industry we have people who follow up on those kinds of tips. We have sometimes help desks and offer help lines for senior investors or people who care for senior investors that was started 2 1 2 years ago out of our Boca Raton Office and has had tremendous success getting calls from every state in the country from people age 17 to 102 calling up with questions of all kinds of things and the goal of the help line is to provide support of the environment for people who have basic questions or concerns about their broker that they would like to follow up on and we assist them as appropriate. If it is something that indicates a fraud, we will pursue it ourselves, refer it to the state regulators, if its just an area of confusion we can help with that too. Thats another way. In some sense youre a cop for the broker dealer industry. What tools are in your toolbox either educationally or in terms of sanctions or fines and just help people understand how you help enforce the rule . Sure. So as i mentioned, we conduct examinations of broker dealers and registered representatives and lately we have had a particular focus on high risk brokers or high risk firms to identify bad actors in the industry. You asked earlier about one of the things you have experienced in the first year. In my listening tour one of the things i was interested in, surprised by in some ways but was pleased by was the level of interest this industry has in maintaining high standards in the industry and a lot of support for us as a regulator targeting bad actors who give the rest of the industry a bad name. We do that through examination programs and if we see something we believe is a problem, if we have jurisdiction we can pursue that through an enforcement mechanism and if we dont, we can make a referral to the s. E. C. We make hundreds of referrals to the s. E. C. Every year. The enforcement proceeding mechanism would be to conduct an investigation and if its contested, it would be a hearing. Where both sides, our Enforcement Department and the firm or individual can present their sides to a Hearing Panel. Which then writes a decision and its a public decision. You can read them. That can be appealed to a public panel that we have and from there it could be appealed to the s. E. C. And up to the federal courts. So theres a disciplinary process we have that is involves many of the types of things you would expect to see. Opportunities to appear. Present your case and to appeal to a if theres an adverse finding you can either impose a fine or bar some individual firm or principal by revoking their license . Yeah. So the Hearing Panel would decide what the appropriate penalty would be. Obviously, finras staff would have a proposal. The consequences could be imposing a fine, a suspension from the industry or a bar from the industry. And you mentioned before were a Self Regulatory Organization. One of the ways that the industry is part of our governance is that on that Hearing Panel there are two industry representatives and one professional hearing officer who hear the first level of hearings and if theres an appeal from that up to what we call our national ajudicatory council and that Council Issues a decision supporting the Hearing Panel or maybe amending their decision and if theres a dispute over whether someone wants to pursue that, then they can appeal it to the s. E. C. So theres multiple layers of appeal processes. Lets talk about Self Regulatory Organizations. Finra is at least in principle Self Regulatory Organization. Well talk about your governance in a minute. There are some people who dont think a regulator should be an sro or at least queasy about it. And think that the regulatory function should be in government. There are others who argue that Self Regulatory Organizations are better in a number of important respects. Could you talk about why you think an sro is preferable and your experience perhaps with an sro . You have been in government and an sro. And, you know, why you think that the sro structure makes sense. Sure. So the sro structure, to give a little background, came out of the security laws so its operating under statute. Adopted by Congress Going back to the exchange act of 1934. There are 33 different sros in the securities world. Only one for broker dealers . Yes. There are different types. Thats my point. Sometimes when people talk about sros and what the issues they present are, its important to talk about what which sro are we talking about. What type. There are for profit sros. Were a not for profit sros, different models. Particularly with respect to finra as an sro. The theory going back to the very beginning of this model was that there are certain advantages in this very complex market that can be achieved by leveraging this model rather than just making the government bigger. Its not even just a size thing. There are certain things an sro could do the government cant do. What are those things . Number one, sros are really meant to interact closely with the industry to leverage their expertise and their experience in the markets and the idea is you get smarter, more effective and efficient regulation in these very complex markets if the people who are close to them can play an active role in developing the regulations. Number two, theres no taxpayer dollars at work here. So the industry thats generating the need for the regulation is the one paying for that regulation. And also because of the funding structure, theres an opportunity to invest in initiatives that may be harder for the government to invest in on a routine basis, so we can make Capital Investments in technology for example that some Government Agencies have more challenge in going through the budget process. We can make longer term Capital Investments as well. Another advantage that has been identified with respect to sros is the ability to operate certain utilities that are require a lot of industry expertise and Technology Like the trace reporting system i mentioned earlier. Another one is the broker check which is the system where information about your broker or the firm you work with is available for you. So you can go in and see hey, is the person im working with even registered because one of the red flags is if youre getting Investment Advice from someone not registered as a broker or advi adviser. We can operate utilities like that. Another advantage is that we can provide compliance tools to be regulated. You dont usually think of the government as part of its job is to provide tools to those that it regulates to help them regulate. I think thats part of our job, to help find ways to provide information resources, tools to the people we regulate to help them comply. I want to get back to that. But one last question on this. I mean, typically when you think of an sro, you think its an industry controlled organization. Finra under its governance structure is not controlled by the industry although the industry has an Important Role on its board and obviously in its processes. So do you think its fair to say that finera is really an sro in the sense of the industry regulating itself since the industry doesnt control it or is there any thinking going on about the governance structure one way or another . I would just be interested in your good question. Sometimes people do think sro means that its entirely the industry regulating itself. There needs to be industry involvement to achieve the advantages i just talked about. But over time theres been the model has been reviewed from time to time by congress which requires some nonindustry the statute requires some nonindustry membership as well as by the s. E. C. And theres a balance to be struck because some people are concerned the industry regulating itself wont be credible and others are concerned that if theres not enough industry involvement in the regulation then why not just have the government do it . The balance that we are working with and its inherent in the model of any sro, you could call it a conflict but one that is healthy in the way i think is how to make sure theres enough industry involvement in the governance and in the actual activities and yet, make sure that that involvement doesnt lead to result that is are not helpful. There have been times in the past where the s. E. C. Has stepped in and said we think you know, in some aspect theres been too much industry influence and that led to results that they thought were not sufficient. Do you have one many mind . Theres the in the 90s there was an s. E. C. Action against nasdaq at the the time. Too much industry involvement in enforcement decisions for examp example. It was section 21a report that came out of that and thats why we look like we do in certain ways. For example, now the industry does not have involvement in the decision of whether to bring an enforcement action. Thats a direct result of the s. E. C. Finding that the industry was not acting when it should have and there are other aspects of it. I think this is not just with respect to finra. Other sros have esolvolved ove the years. All of them have 50 public on the board or 51 . Were trying to strike the right balance between industry involvement and incredible Investor Protection and the big lever is there. On the one hand, industry involvement through representation on our board. We have large firms elected to our board, medium size representative and small firms all elected to our board. We have industry committees that help advise finra and the board on rules, on programs, active involvement by the industry committees. For example, we have a Small Firm Advisory Board to help advise on the impact of regulation on small firms. I mentioned that industry serves on some of the Hearing Panels for disciplinary decisions. Those are examples of bringing industry involvement into the process. On the other side in this checks and balances approach. We have a board that the majority of which are public governors not in the brokerage industry and we have closed s. E. C. Oversight and you mentioned that in your introductory remarks that that has increased in the last year as a result of some policy decisions the s. E. C. Made, theyre going to allocate more of their resources to the investment space and rely on finra and broke ran space to increase their oversight of finra which they have. You mentioned you regard as part of your Mission Helping firms achieve compliance and you also mentioned sort of the industry representation on the board was small. I would like to talk about finra and small broker dealers. Ive heard a lot of complaints about finra and you have identified through your process that is a potential issue. Most of the smaller broker dealers i talked to dont feel like the finra staff interact with adopting the a spirit of trying to achieve compliance but more along the lines of a Government Agency seeking enforcement and perhaps fines. I was wondering would you agree theres something with respect to small broker dealers that maybe needs attention . Are you looking at it . Have you learned anything . Taken steps to make try to change that culture a little bit . So small broker dealers are in terms of number 95 of our membership. 10 of the registered reps out there. That gives you a sense for the a registered rep being an individual that works for a broker dealer . Thank you. So 90 of the firms are small broker dealers but 90 of the individuals who work there the big firms. The larger firms. But the smaller broker model is when i personally feel adds value to our financial system. I think its also particularly important for sort of entrepreneurs trying to raise capital. I think any conversation, its really important to start with the statement that they matter. Its important for people to understand that i think that they bring value to our system. That includes that in many cases they provide services to communities or individuals who might otherwise potentially be underserved, often provide a different set of services than a larger firm might and many smaller firms are active in the Capital Raising process and know local issuers, they know local municipalities who knows the local, you know, water board or the local School District better than people who live there. So its important that we try to find an environment and large broker dealers are located in half a dozen major metropolitan areas and the small are spread throughout the country. This is one of the things i learned on the listening tour was the Business Models that finra represents. Thats part of the challenge, we have so many different Business Models and even in the small firm world, there are startups, there are more traditional Retail Investment advisers, there are firms that focus primarily on capitalraising activities. Different Business Models. We need to figure out a way to try and ensure Investor Protection across all of these different channels but in ways that are not overly burdensome. And thats certainly something im very interested in pursuing. We have been engaging with our Small Firm Advisory Board on their ideas about what to and part of the listening tour. Ive had 12 different roundtables with small firms all outside of the beltway. Theyre not going to get to is any of that going to result in a report or recommendation that the public will be able to see . As part of the 360 initiative thats what i was about to ask. Taken this feedback from the tour and other sources, we are working through various recommendations that we have gotten and our goal is to update people periodically on what we have done in response to what we have heard. And so youll be seeing reports from time to time but were trying to move with the sense of urgency especially on the small stuff. I mean theres big picture things we have done already like confining our Enforcement Programs which we announced, we had two programs legacy from the entities that we were merged together to create finra and people experienced that as two regulators or different approaches. So we analyzed the issue and decided we could be more efficient by merging those departments. Thats a type of organizational change that will take time to implement but we have determined to move forward. Were looking at other changes but in the meantime there are more nuts and bolts things that i hear when im in the roundtables. Lets talk about finra 360. Why dont you try to explain what it is, what youre trying to accomplish but also the timeline, is it going to result in reports, recommendations . Because at some point we need to move past talking about change and trying to get some change done. We have done some changes. Thats true. You know, we have this merger of the Enforcement Programs i just mentioned. Go on our website and see finra 360 page which will give you a list of things we have done so far. We issued a notice earlier this year on how we engage with the public. And through our many Advisory Committees and our membership and other stakeholders and about a rulemaking process. What types of we have got a lot of healthy feedback and working with our board. One of the areas where there was interest for example, was to have more transparency into our board. So we have created a new governance web page that provides more information about who is on our board, what their backgrounds are, what committees they serve on. Were working to provide guidance around the Committee Structure we have and how you can get involved and what the committees do and also looking at the structure itself and moving to having looking at whether there are some committees that we dont have but should have or we need to restructure some of the committees. Its a rolling process david. Were trying to get things done rather than wait until the end and do a big bang. We will periodically well, we are constantly updating our web page when we do something new. I think when we get to issues around changes in our governance structure and things like that, well take the input we got and either act on it and share that or well talk about it with our board about why we wouldnt. You mentioned the treasury report. That is called for review of sros. That only came out this morning but were thinking about how our 360 can be i think youre way ahead of most of us on that having initiated this process seven, eight months ago now . Yeah. Well, you mentioned transparency. Lets talk about transparency. One of the criticisms that a number of people have made including myself is that finra is not sufficiently transparent. Theres a couple different aspects of that obviously and obviously theres you cant have total transparency with respect to confidential private information and certain other deliberations just like there is at the s. E. C. On the other hand, you have made some changes in terms of reporting more information about board of directors meetings but on like securities and Exchange Commission meetings, finra Board Meetings are closed so its you and perhaps the chairman and a couple of key staffers describing what happened, you get no sense of who was saying what, what the real arguments were and for or against the particular proposition. There arent minutes although now you report some of the actions taken. Are you thinking about any additional changes to the transparency at the board level or are you comfortable where you are at this point or do you want to wait and see or well, as i mentioned, youve identified a couple of things we have been trying to work on which is give more information before the meeting about what were going to be talking about and more depth into our description of what was discussed at the Board Meeting and thats a journey. I think more work we are and will be doing on that front. In response to this engagement notice where we really opened ourselves up to the world to el us how you think we should be thinking about our engagement, there were comments about whether we ought to make our Board Meetings open to the public and so we will be taking those comments seriously and well that will be a board level decision. Its not going to be a robert cook decision. Thats going to be talked about at the board. I think the fwiguiding principl that at least in my view ought to be taken into account there is, you know, will this be help us be a better sro. Be a better Self Regulatory Organization. I think there are different views on that, right . Some people would say having things open to the public, you see what people are saying but youre not seeing as much a candid discussion go on as you would in a private meeting. So those are the kind of balancing that needs to happen but i think that to your question about will that be something thats considered, absolutely because were going to walk through all the significant governance recommendations with our board to get their views on this. Lets switch gears and talk about your arbitration process. I mean, thats a significant part of what you do. And just for the benefit of people, most broker dealers require their customers to sign an agreement that commits to arbitration. And the arbitration is almost always at finra. So customer disputes are resolved by arbitration. Maybe if you could take a minute and describe your arbitration process and well talk about some of the potential reforming to that process. Its what, roughly 4,000 arbitrations a year conducted . We have a lot of information on our dispute Resolution Program on our website. Which i welcome you to look at. We do arbitrations and mediations. And as you were saying, david, this is a process to resolve disputes between a customer and a broker, whether an individual or firm. Or within the industry. Between a broker and firm or between two firms. Thats true. Now finra does not mandate arbitration to resolve disputes but it is typically a provision of brokerage contracts at the arbitration and the question whether there should be a b a y arbitration or not, the s. E. C. Has authority to those. Most disputes are subject to arbitration and finra operates a forum run pursuant to rules that have been filed with and approved by the s. E. C. After Public Notice and comments. Its a rulesbased system where the parties can resolve their disputes and without going to court. As is typical for these Arbitration Programs, the arbitrators are pulled from a roster of public or industry arbitrators who are presented to the parties and they have they can strike names and kind of reduce the list to a panel that they are comfortable with. For larger disputes, about 50,000, its a three arbitrator panel. Threeperson panel. For smaller disputes we have a small claims process which is under 50,000 with a more expedited procedures for smaller claimants to resolve their disputes through arbitration. Now, the customers can now elect three public arbitrators. Either party could. Some folks dont are critical of the effective mandate because the broker dealer has it in their contract that theres arbitration. That raises a question why is arbitration better than a normal court or is it . And then there are a number of other things we can quickly go through for example the arbitrations are closed. You can walk in a courtroom and see whats going on but if youre a reporter of the public, you cant walk into a finra arbitration. So the transparency issues arise there. Then while your rules are more structured than an American Arbitration Association arbitration which basically are rulefree, but theyre much less structured than a court and one of the complaints that ive heard is that its very difficult for those representing customers to in effect get discovery out of the broker dealers. So if you could sort of maybe touch on those three things. Well, there clearly is an active debate about whether arbitration should be mandated. Traditionally in the securities industry, the s. E. C. Has encouraged to maintain an arbitration form because the perception it provides in many cases a cheaper, more effective way to resolve disputes than might be available if they went to court. So its the s. E. C. Has taken steps over the years to encourage that there be an sro run Arbitration Program and we effectively are that program now for the other sros by contract. So the question of we do prohibit brokers from requiring customers to wade out of class actions and brokage customer can participate but if its an individual claim the brokers rule would contract would require it be arbitrated. The question whether thats a good idea is with the s. E. C. I should footnote i think one of the important things about maintaining a vibrant sro model is we recognize there are certain things best decided at the federal policy level and i think this is one of them. This is important enough issue that an sro shouldnt be deciding. A federal policy maker should be deciding it. Lets change gears. Cybersecurity has been in the news. The s. E. C. Hack, every Government Agency appears to have been hacked an i heard this morning the nsa has been hacked. Theres a lot of highly confidential, Sensitive Information held by finra members so cybersecurity is an important issue. What is finra doing in that area to help secure customer information, you know, how do you balance the need for cybersecurity of customer database information with either not having outdated rules or having rules monumentally expensive. Can you take a minute or two to discuss what youre doing there . Sure. So we dont have a prescriptive cybersecurity rule. We do include rules in our examinations of broker dealers because we think it is important. What we are trying to do is to help firms identify areas where they could improve cyber capabilities. Absolutely, its incredibly important for the industry. This is do you have a special shop in finra that looks at this . We do have a special group as part of the examination function. This is an area where the industry and were aligned, no one wants to have a cyber breach. The question that comes up is why dont you have a cyber rule and i think the challenge is that many of the entities we regulate are also regulated by other entity other regulators like the s. E. C. Or the banking regulators. And we are very focused on avoiding duplication or inconsistent rules. I think this is an area as regulators it would be important to come together and to develop more uniform approach to cybersecurity and again, back to my mantra that sros are really good at certain things but other things that ought to be set at a federal level. I think we could be helpful but this is guidance how to approach this issue that would best come at the federal level. Its an area were focused on and our firms are focused on and its an issue we all care about. In 2016 finra imposed 175 million in fines. One of the criticisms of finra is how that money is used is sort of opaque and not fully disclosed or transparent and another criticism is that the money even stays with finra, therefore, provides an incentive for finra to impose fines because it helps contribute to your budget. Is there are you looking at making the use of that money more transparent . And what is your feeling about whether that fine money should be used for the budget or given to an investor Reimbursement Fund or the treasury, whatever . Yeah. Fine. So the issue of fines first of all, last year was our largest fine year ever. So its a bit of an outlier but traditionally finra has used fines to help support capital projects. Where do we get the money to help do like treasuries initiative i mentioned or to operate help do the crossmarket surveillance activities i talked about where were pulling in sorry. Were pulling in a lot of data and analyzing it to look for trading anomalies and the like. We get that we allocate fine money to that. And were not the only sro that collects fines by the way. Sure. There are other sros that do as well. And the s. E. C. Has looked at this issue from i think at one point they proposed a rule that would govern how the fine money was used by different sros and basically had the same if i recall correctly, had the same guiding principle that the fine money ought to be allocated to regulatory support regulatory functions or in our case, a capital initiative. That said, we are looking at this issue. Were in the process of preparing our budget for 2018. And as part of that, were working with the board to think through what is the right approach to fines Going Forward, how could we provide more Richard Sherman raised this in jay claytons hearing maybe. It has been raised. So were looking at how can we provide first of all, what is our policy . Lets revisit our policy on fines and where do we want to go . Recognizing that while we feel confident that we are not going after fines just to get hit a number or to achieve a revenue goal or Something Like that. We recognize that theres a perception issue and so we want to talk with our board about what should be our approach Going Forward on fines and i think youll also see were working on a number of aspects of our the principles guiding our budget Going Forward that after we set the budget in december we would hope to share more about what changes were making there. Its part of the 360 initiative. Okay. The jobs act created a regulatory category, a crowd Funding Portal. Which is regularly by finra. How many crowd Funding Portals are there now and what have you learned about them and what its like to regulate crowd Funding Portals as opposed to traditional broker dealers . And are there changes that you think are appropriate . Well, we have yes. Post jobs act would set up the crowd Funding Portal and the s. E. C. s rules on that. Weobligation to set up a registration. I think we have about 29 portals now. Either 29 its either 20 or 30. I dont remember the exact number. But its a area that we think is important and its a good example of how we could try collectively to create a tailored regime to a particular business model. We have done that in other areas as well. So its something we want to help support. I think to the extent that weve gotten some comment in our comment file, we opened up all our rules related to capital formation. We said everything that touches on capital formation, if theres a finra rule or process that you have a comment on, please comment on it so we could figure out what we can improve on and we did get comments on the crowd Funding Portal. Theres some concerns about the limit being too low. Thats not something we can set. But you know, that might be something to explore. And ive heard that some people are concerned about the process and thats something for whether weve tailored our engagement with those types of firms appropriately to their Business Models and thats something thats very open to having a conversation on and learning how we can help support it, because we do want to help support that model. All right. Two more questions and well open it to audience. More and more in government, we have introduced economists, the rule making process and the idea of costbenefit analysis and regulatory analysis and so on down the line. You have now established an office of the chief economist, are starting the process of introducing economics and costbenefit analysis to your rule making process. What have you learned so far . What to you anticipate happening along those lines . Is there a way for the public to become more engaged in that process . So, yes, as you mentioned, we have established an office of chief economist run by a great chief economist whos had experience in other regulators as well, including the s. E. C. And we put forward a guiding set of principles of how we will use Economic Analysis in our rule making process. And i think its a very interesting effort because were sort of trying to tailor Economic Analysis as its applied in the federal context to the sro context. So if you look at our Guiding Principles on Economic Analysis, youll see more in there about engagement with the stake holders early on, because one of the things we do is that when we have a rule going up to our board we run it by a number of our Advisory Committees so, they actually see the rule text before it even gets voted on, and they can comment on it. That doesnt happen at a federal regulator thax the industry gets to see the rules and give their thoughts on them before theyre even voted on by the board. And my limited time at finra, i can assure you theres often change in direction taken as a result of the comments that we get. So we have this process where a rule goes through a comment from the committeeings, goes our board, nay get the benefit of hearing what the industry comment was, then it goes out for public comment. So anyone can publicly comment on our rules. We that i can ta comment into account and our chief economist is very much involved. Thats a stage were really trying to get data to help inform our Economic Analysis supporting the rule and understanding what the potential consequences might be. And then i want gets filed with the s. E. C. Where it gets put out for comment again. And so its ral hi changed that the point. I would disagree with you on that one. There are times when as a result of comment that comes in during that comment process at the s. E. C. That we have to refile it and we have to respond to those comments at a minimum, but we often amend our filing as a result of comments that we receive. So theres at least two opportunities for public to comment, and one other thing id mention about our chief economic u. S. Office, which we are expanding because i think uts very important part of what we do, both in the rule making context and informing our policymaking and our understanding of the markets generally, were also ramping up our retrospective rule reviews, so this is take a look at an existing rule and look back on how its working and not just not just the rule. But the processes we follow to implement the rule, which can be as important as whats on the written page itself. And to get public input on that and then revisit those rules. Theres lot of lip service now to retrospective review, but in government its very rarely done. So before we open it to the audience, one sort of last openended question. What do you see is your priorities Going Forward . Any particular message youd like to convey to the audience and our listeners . Well, i think number one finra 360 will be a high priority for me and our organization Going Forward. A lot of support from the board. Its not going tock a quick process. We think of this as a multiyear process, but we think its a very healthy process for us to be going through. Two, were going the stay sharp and vigilant on performing our regulatory obligations and that includes particular focus on highrisk brokers or bad actor, and i think that aligns very well from what youre hearing about the s. E. C. For their focus on retail issues. That will be very much part of our agenda Going Forward. And the third thing i would mention is this listening tour is ongoing so, were open for business in terms of getting input from people who have ideas, thoughts, the best ideas in many cases come from the people we regulate or who deal with our regulations or who represent customers. So in that vein, david, i appreciate your interest in finra and your thoughts in your paper and otherwise we want the input from any source and were going to use look at it and say can pe we be a better sr toshgs live up to the promise of the sectionro model and if so w adopt. Audience questions. If you could say your name and institutional afl yags before you ask. Yes, maam. Doesnt matter. As long as we can hear. Hi. I wrote some notes out. And ill read them and if you can address them. Its pleasure to meet you in person. Weve corresponded by email. Could you saw your name and institutional affiliation . I was hoping to say that for last. Im carrie devra, the First Investment client ever found in bad faith in industry only sr oeshgss. So my questions are, finra is a securities only sro, its limited to securities brokers and brokerages. Finra takes custody of complaints it gets Investment Advisers. Congress has s not given finra investment oversight of advisers. And youve heard investor complaints into your forum when your own website States Investment client complaints and Investment Adviser issues are goto go to the courts or to forms other than finra. You state that investment clients must sign special agreements, submission agreements when, in fact, youre having investment clients sign the brokers agreements. The reality is, is that theres a highprofile case now that i would love you to address set from that. The brokerage check is not telling the investment clients the reality that you are a nonneutral forum because you are industry paid forum, youre not listing on the broker check the denials, the expungements, the settlements, or cases that have aged off a brokers time line. Maam, could you try to wrap it up . Sure. Just one more point, which is very important. There are lawyers who are bringing investment clients into your forum across state lines when the lawyer is not licensed in the jurisdiction. So finra has been allowing lawyers to work in conflict with the resident associations. I would appreciate it if you would address those points. Thank you. Well, just to gave little context, i think some of what i heard and i didnt make this point before but its an important one. Finra only regulates the brokerage industry. We do not regulate Investment Advisers. And that can be confusing to people because those are two channels through which people get personalized explore it that industry has resisted it. I was going to get into that but we dont have enough time. But finra doesnt regulate Investment Advisers. Theyre regulated by the states or by the s. E. C. And so i of been trying to make it clear whenever i can, although ive neglected to d so earlier, there are boundaries to what we regulate. You also mentioned broker checks. The platform that i referred to earlier where you can go online and see not only whether your broker is or our adviser is registered, either with finra or with the state agency, but also their disciplinary history. And there are lots of views on both sides about whether we put enough information in broker check or whether theres information thats not in there that would be useful. Its topic that our one of the areas where our chief economist and his ability to conduct very thoughtful research has been helpful to us in forming we have a special part of our board looking at the issues of broker check and what kinds of information should be disclosed there. I think there are more specific questions that are more detailed than i can address right now, although im sure we can find finra to help and hear your comments more specifically on these issues. Yes, sir. Im mark chef with investment news. First of all, this is an interesting moment in the feedback tour. Youre sitting a few feet away from one of finras critics. Would that be you . No. Mr. Burden. I just report. But mr. Burden has written a finra quote is largely unaccountable to the industry or to the public, due process, transparency, and regulatory review protections normally associated with regulators are not present, and its arbitration process is flawed, reforms are necessary. Youve spoken a couple times today about taking matters to the board, youre going to discuss it with the board. But what is your gut feeling about whether finra 360 is really going to make fundamental changes like the ones that mr. Burden outlined in this abstract . Well, i do not know if i eel ever be able to make david a happy man, but happy. In fairness to both of us, really, davids article i think identified a number of issues that he said finra should consider. And or that other policymakers should consider. And he also identified a number of paths forward, which included finra looking carefully at itself. And theres what were trying to d. You know, there are a number of things that i think are ideas that are in the davids piece that i think are probably in my mind more challenging to think about adopting because as i said before, i want to look at whether its going to make us a better sro. Some things theres this pendulum. Some people would have us look more like the government in some ways and some people would have us be more responsive to the industry. And i think we need to find a careful middle ground and a balance. So i think we have to take a holistic view to that and make sure we are trying to manage that tension appropriately. I do think that one of the things i learned from the listening tour, i believe, is that there may be many ways to optimize. In other words, to find ways to help the industry comply and to reduce unnecessary burden without reducing Investor Protection. And i think theres a lot of good work that can be done along those lines, which i think will have the most meaningful impact to our members while also helping us pursue the mission of protecting investors and promoting market integrity. Linda. Wait for the mike. I dont think i really need this mike. Following the beginnings of 360 and where you are in the listening tour, of the changes that have already been implemented as a result, what are the one or two things that youre most proud of . Well, ill give you two examples that i think are helpful. One is this combination of our Enforcement Program is a significant change for us and its not done yet. Its a lot of work needs to be conducted to integrate to organizational groups and not just change reporting lines but make sure were looking at process flows and principles and the like. So i think thats a meaningful significant change. It was something that was raised in the comments on our e engagement note, something that was suggested to us, but something frankly our own folks had identified as an issue as well. We take this feedback and look at it and think whats the problem, are we diagnosing it the right way, and i think that was a healthy outcome of finra 360. Two other things. One is we of committed to providing by the end of this year a statement of exam findings. What do we see on exams . And so this should be coming out relatively soon, this quarter, and the idea behind sit that a number of firms have said finra, youre conducting exams across different firms, what are you seeing so that we can get ahead of that issue . The reason i like that idea is because it ties back to one of the points i was making earlier, why have have an sro, theres an ability to help firm cease what were seeing and give them tools to better comply with rules to get ahead of the issue. One other thing ill mention is something weve don internally at finra is to solicit input from our employees about how they can do a better job. And we collectively can. Weve got some great ideas from our employees that we are in the process of implementing. Some of them will revolve around training. Some will revolve around the tools that they have. But, again, a lot of opportunity to take a fresh look at what we do and i think that willingness to look externally, hear what people are saying externally, and hear what our own people are saying is part of finra 360 im most excited about. Georgia. Hi. Georgia quinn. I disclose. Thank you, first of all, for coming. We really appreciate this. When we started this discussion today, you noted that 90 of your member firms are what you consider small firms. And when you look at the board requirements and the board makeup, of the seven seats that are dedicated to member institutions, three of them are dedicated to small firms which are defined as 150 or less employees. So that really doesnt seem that small to me considering the makeup of your membership. One is designated for a medi mediumsized firm and three are designated for large firms, which are 500 or more. I just was wondering if you could kind of go through rationale behind that and if you think there might be an opportunity to distribute those seats and representation. So the rationale for allocating the membership the representation on board that way is that we want to have a fair representation of our members on the board and we the details of how this particular structure emerged are kind of buried in the history of nesd and where we came from. I will note one thing, which is that the structure we have including the board makeup, was voted on by the members in connection with the merger. So theres some element of democratic principle in terms of how we got to the government structure that we have. That said, ive been interested in how we can make sure that the views of the small firms and we have some great Small Firm Governors theyre all great and we have the Small Firm Advisory Board that i mentioned earlier. And that is another thats one of the committees that every rule that we that goes up to the board has to go through that committee to make sure we hear their views. And i think its part of the 360 process in looking at our committees. One of the areas of interest to me is figuring out how to make sure we enhance the voice of that membership. Changing the structure of our board actually requires a vote of our members. And thats a much more difficult process to go through. But theres lower hanging fruit that we can might be able to pursue to make sure that were hearing the voice and the different voices in the small firm membership, because theyre not all the same. One of the things that we of don as part of finra 360 is to launch something we call an innovation outreach initiative, and i mention it because of the point that many of our smaller firms are Technology Innovators and we want to make sure were engaging and hearing from them about where our rules may be getting particular staff person thats leading that effort . Yeah. We have a whole we have an office who is that if you dont mind . Yeah. His name probably people that want to office of emerging regulatory issues and theres a fellow named jaime werke, but there are others. Its group. They are doing a series of roundtables. One in san francisco, one in dallas, one in new york to meet with Technology Oriented members about what theyre doing, and also were setting up a new Advisory Committee which will have its first meeting later this month to help us understand better where you know, we want to make sure we understand whether Technology Developments that are happening, where are they our rules may be getting in the way and what risks are there being created for investors that we all care about. But i mention it in a small firm context because its just an example of how we have heterogeneity in our small firm makeup that we want to make sure were paying attention to. One or two additional questions. Yes, sir. Im with fsi. My question is another issue thats getting a lot of attention here recently is unpaid arbitration claims. And i was wondering if finra has analyzed and quantified the size of that problem and whether youve considered things like using fine revenue to cover those unpaid claims. So we of been taking a broad look at the issue of unpaid claims, trying to understand whats what causes them and what we can do about them. We this is an area of interest to other regulators as well so, the states have been taking a look at this issue and we want to make sure were coordinating with them. Our board has recently approved putting out for comment some changes that are meant to give finra more tools to deal with issues are someone might be trying to avoid a claim by moving to you know, reorganizing or selling their assets or Something Like that. We already have some tools there. Were very vigilant about trying to address those situations. But we think theres more we can do there. But theres a range of other issues, some of which other approaches that we can consider, and so we want to pursue a dialogue around this issue, particularly with the s. E. C. Going forward. And, you know, we one of the comments that we got on the engagement notice was a request for more information about unpaid arbitration awards, how much, you know, how many in terms of dollars, numbers. And so thats something were looking at trying to put out more information on in a relatively near future. Yes, maam. Hi. Jenny grunberg with the competitive enterprise institute. Im wondering what is your stance on the ban of minimum arbitration clauses . No stance. I mentioned before we try to run a fair, efficient Arbitration Program, implementing what we understand to have been a policy direction at the federal level for some time. But the decision about whether there should be a ban or not i think is one that is in the hands of the s. E. C. And as i mentioned before appropriately so given that its a significant policy issue and we shouldnt be using sros to use all policy issues that ought to be resolved at the federal level. Well, thank you very much for joining us. Thank you, david. Appreciate it. This concludes our event. This week the Supreme Court heard an appeal over legislative districts in wisconsin after a lower court concluded the states republicandrawn map constitutes partisan gerrymandering. We will play this oral argument in its entirety tonight at 8 00 p. M. Eastern on cspan. Representative linda sanchez, vice chair of the House Democratic caucus, is our newsmakers guest this week. Shes the fifth highest democrat in the house. In this interview with reporters from the Washington Post and los angeles times, she talks about her partys leadership. I personally think our leadership does a tremendous job, but i do think