Robert Cook, FINRA CEO, took the stage at SIFMA’s annual conference on Tuesday, diplomatically answering questions from Saima Ahmed, executive vice president and general counsel of SIFMA.

The main topic of discussion was the robust SEC rulemaking agenda over the past few years. Right after he spoke, his chief operating officer provided a blunter assessment.

Cumulative impact of rules

Ahmed noted that the SEC has finalized 31 rules since 2020 and 31 rules are expected to be finalized in 2024. What does this mean to the self-regulatory agency that oversees broker-dealer firms and individual, registered brokers?

Cook said it means four things for his staff:

• “We will try to read the proposed rules and comments submitted and try to understand the issues involved.”
• “We will implement the ones relating directly to us.”
• “We’ll adjust our oversight of registered firms and brokers.”
• “We will modulate our own rulemaking to assess and manage the cumulative impact of these rules and the collective burden in the industry.”

Cook said FINRA can weather whatever is coming because of its effective structure; the agency engages continuously with the industry through its outreach efforts and its board committees. “Most of our board decisions are unanimous, and if not, they are passing by very large majority decisions,” he said.

Engagement with partners

As an example, Cook mentioned Rule 3110, a rule focused on periodic inspections of non-branch offices, that needed some modernizing to reflect the realities of the work-from-home and hybrid work arrangements. “Our amendments in the residential supervisory location and remote inspections rules were only possible because of the industry engaging with us,” he said. (The remote inspections rule has a three-year pilot program timeframe.)

“We worked with industry participants, state regulators and the SEC on these amendments – and we hope to do the same on aspects of the consolidate audit trail that industry participants are still concerned about,” Cook said.

The main concerns revolve around how CAT is funded and the personally identifiable information (PII) that will be collected by CAT. (The audit trail requires broker-dealers to develop a plan detailing how they would create and oversee a consolidated audit trail that collects and accurately identifies every order, cancellation, modification and trade execution for all exchange-listed equities and options. The funding question is currently being litigated; participants and industry members are on the hook for financially supporting it.)

Cook said the transaction database in CAT collects orders and details of order flow, while another database within CAT collects the account information about everyone with an account in the system. You can track the former to find out about the customer details in the second one, and privacy and data security issues linger in Cook’s mind. And in many others’ too.

“The SEC took out social security numbers and a couple of other details, but your name and address is still there – and we wonder if this is needed,” Cook said. He’d rather see it operate in such a way that a broker would have to request the customer’s name and account number that is needed, rather than the broker having visibility into all the names and other details in the system.

Reg BI

Ahmed asked Cook about FINRA’s Regulation Best Interest examination program, which Cook said was mature at this point. “The focus is on what reasonably alternative products are being suggested to clients, compensation arrangements, and novel, high-risk products,” he said.

“What are your thoughts on the Department of Labor’s fiduciary rule for advisers?” Ahmed asked him.

Cook said it’s certainly broader than Reg BI, and he wonders why Reg BI is not perfectly effective to solve the problems DOL seeks to avoid or mitigate with a new, higher standard of care.

Ahmed said SIFMA was opposed to it, largely for that reason.

“FINRA member firms have done a lot to comply with Reg BI, and now we have this new standard. Why have different rules to govern the sale of similar products and services in the market?” he wondered out loud.

Seidel more critical

FINRA COO Joseph Seidel had a sharper assessment of the plethora of SEC rules – two new ones just in March, as he reminded us. “Markets are resilient,” he said. “But this amount of rule change could negatively affect the market as a whole, plus industry participants, investors and even governments,” he said.

This is because conflicts between rules and misinterpretations of them are likely to develop and take up a lot of time and resources among everyone involved in the public markets, he said. Compounding the problem are the plethora of state rules, especially state-based Regulation Best Interest ones (never mind DOL’s version) that lead to confusion and undercut the consistency intended by the SEC’s Reg BI standard.

• Our report from Monday at the conference