September 8, 2017

House Financial Services Committee – Capital Markets Subcommittee “Oversight of the Financial Industry Regulatory Authority”

Key Topics & Takeaways

  • FINRA 360: Several Representatives asked Robert Cook (President and CEO of FINRA) about FINRA 360, the organization’s multi-year reform effort. Cook said that FINRA gathered a large number of comments from broker-dealers and other stakeholders and that he conducted a “listening tour” to better understand the industry’s concerns about FINRA. Cook conceded that many of the comments were “negative” but said that FINRA has already taken steps to improve transparency, accountability, and enforcement practices as a result of the comments it received.
  • Examination and Enforcement: Cook was repeatedly asked about FINRA’s examination and enforcement practices, and said that FINRA recently consolidated all enforcement actions in to one division. Cook was also asked about FINRA’s enforcement of best execution requirements in Alternative Trading Systems (ATSs). Cook also spoke repeatedly about FINRA’s examination priorities and recent changes to the exams themselves.
  • Fiduciary Duty Rule: Rep. Ann Wagner (R-Mo.) asked Cook if he supported having the Securities and Exchange Commission (SEC) take the lead in developing a best-interest standard for broker-dealers. Cook declined to endorse an SEC-led approach, but did voice support for a uniform best-interest standard.


  • Robert Cook, President and Chief Executive Officer, Financial Industry Regulatory Authority (FINRA)

Opening Statements

Subcommittee Chairman Bill Huizenga (R-Mich.)

In his opening statement, Subcommittee Chairman Huizenga discussed the importance of capital markets for American investors and gave an overview of the Financial Industry Regulatory Authority’s (FINRA) predecessor organization, the National Association of Securities Dealers (NASD), as well as the creation of FINRA. Huizenga noted that some industry participants have accused FINRA of “mission creep” and noted that because FINRA is a self-regulatory organization (SRO), it lacks the mechanisms used to hold government regulatory agencies accountable to the public. Huizenga also discussed FINRA 360, the organization’s multi-year reform initiative. Huizenga closed by mentioning the recent launch of the Trade Reporting and Compliance Engine (TRACE) for U.S. Treasury securities.

Rep. Brad Sherman (D-Calif.)

In his brief opening statement, Rep. Brad Sherman discussed the “important role” that FINRA enforcement actions play in preventing abuses by brokers and discussed the amounts FINRA levied in fines and returned to defrauded investors. Sherman said that it is important that FINRA “make the right decision” when it elects to keep settlement money.


Robert Cook, President and Chief Executive Officer, FINRA

In his testimony, Cook discussed the Securities and Exchange Commission’s (SEC) creation of a new office to oversee FINRA and said that he welcomed this development, and then gave an overview of FINRA oversight activities. Cook then pivoted to discussing FINRA 360, which he said has already enhanced the transparency of FINRA’s board activities and led to the creation of a unified enforcement department within the organization. Cook also discussed FINRA’s senior investor protection activities, including the creation of an abuse tip line and a new rule that allows FINRA members to halt disbursements they find suspicious.

Question and Answer

Public Capital Markets

Huizenga led off the questioning by describing the recent observed declines in initial public offerings (IPOs) and in the total number of public companies in the U.S. Huizenga asked Cook what regulatory steps FINRA could take to improve the environment for public companies. Cook said that FINRA is undertaking a holistic review of its capital raising rules, and has created new rules for “capital acquisition brokers” who primarily raise capital through private placements. Cook noted that many of FINRA’s members have also called for lifting the cap on money that can be raised through crowdfunding.

Rep. Jim Himes (D-Conn.) noted that a 7% gross spread for IPOs is a “remarkably consistent” feature across the market, and noted that gross spreads averaged 7% both before and after the passage of the Jumpstart Our Business Startups (JOBS) Act. Himes asked if young companies exploring IPOs are getting the best price, or if the consistency in gross spreads is a sign of market collusion. Cook responded by calling for a dialogue with all relevant parties, including issuers, to discover why gross spreads have remained the same.


Huizenga asked Cook if the FINRA 360 process has shown any “industry consensus” on needed changes to FINRA. Cook noted that many of the comments FINRA received discussed FINRA’s internal organization and the impact that organization had on member firms. Cook specifically noted that many comments discussed the multiple enforcement bodies within FINRA, and reiterated that because of FINRA 360, FINRA has consolidated all enforcement activity into one department.

Rep. Tom Emmer (R-Minn.) asked Cook for the total number of comments received through FINRA 360. Cook did not have an exact number, but did concede that many comments were “negative.” Emmer asked for details on how FINRA will address these “negative” concerns, and said he was concerned with FINRA’s lack of transparency.

Examination and Enforcement

Rep. Stephen Lynch (D-Mass.) asked Cook if the maker-taker rule is leading to “suboptimal routing” of orders by brokers. Cook said that FINRA has issued further guidance on best execution and is planning on focusing on best execution in future examinations. Lynch then pointed out that there have been several recent, high-profile enforcement actions undertaken by both FINRA and the SEC against broker-dealers operating their own Alternative Trading Systems (ATS), but noted that FINRA has not launched any enforcement actions against these broker-dealers for violating best execution requirements. Cook defended FINRA’s actions, saying the enforcement actions have focused on the disclosure provided by the ATSs in question about how orders were handled.  Cook also defended FINRA’s inclusion of best execution surveillance as part of its examination process.

Lynch noted that FINRA makes data about individual broker violations available on its BrokerCheck platform, but that it does not allow people to access “bulk data” to identify brokerage firms with a large number of violations. Cook said that the system was created to allow customers to look specifically at their broker, and Lynch expressed support for changes that would allow people to identify and avoid, at the firm level, brokerages with a large number of violations.

Rep. Carolyn Maloney (D-N.Y.) asked Cook to describe the cyber practices of the entities FINRA regulates. Cook said it is an area that is “always in need of improvement” due to the evolving threats to the industry. Cook said that FINRA has made cybersecurity practices an exam priority and provided best practices recommendations to the firms it regulates.

Sherman noted the approximately $173 million in fines collected by FINRA last year, and asked if FINRA is planning on returning a greater percentage of this money to investors. Cook said that fines are used to develop new technological platforms, such as TRACE. Sherman said he “hoped” FINRA would furnish more information about how fine money is being used to the House Financial Services Committee and to the public.

Fiduciary Duty Rule

Rep. Bruce Poliquin (R-Maine) said he believed the Department of Labor’s fiduciary duty rule created confusion in the market and imposed high costs on brokers and savers, and Cook responded that FINRA supported a “uniform standard” for brokers. Rep. Ann Wagner (R-Mo.) asked if the DOL consulted with FINRA in a “substantive way” before rolling out its fiduciary duty rule, but Cook said that FINRA only provided technical advice. When Wagner asked if FINRA supported the SEC taking the lead on creating a best interest standard for broker-dealers, Cook would only say that FINRA supports a uniform best interest standard for all broker-dealers. Cook also said that he has heard “anecdotal evidence” of the fiduciary duty rule imposing high compliance costs on small broker dealers.

Trade Reporting and Compliance Engine (TRACE)

Maloney noted that FINRA recently began requiring its members to report transactions in Treasury bills to TRACE, and asked Cook if he believed that Treasury transactions should also be reported publicly. Cook said that because reporting Treasury transactions is new, it is important to first ensure that TRACE is collecting all relevant data. Cook noted that TRACE only applies to FINRA members, and that T-bill trades by banks are not reported to TRACE. Cook cautioned against requiring public disclosure “of some people’s trades, but not others.”

Consolidated Audit Trail

Reps. Sherman, Hill, and Warren Davidson (R-Ohio) all asked Cook questions about the implementation of the Consolidated Audit Trail (CAT) as well as FINRA’s plans to protect Personally Identifiable Information (PII) in CAT. Cook said that FINRA itself is not collecting any PII, as the SEC did not select FINRA to be the vendor for the project. Hill asked if data security issues could justify a delay in implementing the CAT, but Cook declined to give a definitive answer.

SRO Status

Rep. French Hill asked Cook if FINRA is best thought of as a wholly-private actor or a government entity. Cook defended FINRA’s SRO status, saying the organization can draw on industry expertise in crafting regulations without using taxpayer money. Cook also noted that FINRA has a mix of industry and public representatives on its board, and that the organization is overseen by the SEC. Hill responding by asking if FINRA should be required to conduct cost-benefit analysis or be subject to the Freedom of Information Act (FOIA). Cook argued against these changes, noting that other SROs are not subject to those requirements. Cook also argued that broker-dealers still have a voice in FINRA, and that recent organization changes to FINRA were to prevent “undue influence” from regulated firms that created conflicts of interest.

Markup Disclosure – Rule 2232

Sherman noted that many dealers are concerned that they will not be ready to implement Rule 2232 by the May 2018 deadline, and asked if FINRA was considering extending the implementation date. Cook responded by saying that FINRA is aware of possible implementation issues and has issued guidance to help prepare the industry for the rule.

Margin Requirements – Rule 4210

Rep. Randy Hultgren asked how FINRA is helping broker-dealers implement the requirements of FINRA Rule 4210. Cook said that FINRA is committed to rolling out the rule in a “thoughtful way,” and said the organization is considering releasing more guidance about the rule.

For more information on this hearing, please click here.