As important as Schroeder’s promotion is the long-awaited decision to eliminate Market Regulation’s enforcement program, Market Regulation-Legal, and combine its staff with Schroeder’s team, including Jessica Hopper, Senior Vice-President of Regional Programs, and Russ Ryan, Senior Vice-President of Rockville Enforcement. This decision shows that Robert Cook, CEO of FINRA, was truly taking note during his Listening Tour, as Market Regulation-Legal has long been a source of member firm frustration due to its focus on small dollar trade reporting cases and use of quasi-strict liability standards. Neither the industry nor fellow regulators understood FINRA’s rationale for the duplicative enforcement programs. In addition, there should be considerable cost savings from the elimination of redundant positions. This decision was not a surprise, as Cook signaled it in his address at the FINRA Annual Conference and in other public remarks. It also shows that his FINRA 360 initiative – which is designed to identify opportunities for improved efficiency – is working and, more importantly, will result in significant structural changes. In the long term, the combination should put the brakes on the minor market regulation cases based on immaterial reporting errors. The elimination of this docket is also consistent with Market Regulation’s failure to be selected as a Consolidated Audit Trail (CAT) processor, for FINRA will lose its jurisdiction over a broad swath of trade reporting once CAT is operational.
Cook’s final move underscores his personal investment in FINRA’s enforcement program. Enforcement will now report directly to Cook and Schroeder will serve on FINRA’s Management Committee. Cook clearly believes that the Enforcement Department is key to FINRA’s future. The new reporting model foretells the end of FINRA’s Regulatory Operations structure, which consolidated examination and enforcement functions under one senior leader. In addition, the removal of the enforcement portfolio sets the stage for the merger of FINRA’s three examination programs (Member Regulation Sales Practice, Risk Oversight and Operational Regulation, and Market Regulation examinations) under a single executive.
These moves should put an end to the speculation regarding Cook’s commitment to a strong enforcement program, and whether he would break with his predecessor’s enforcement strategy. Much has been made of Cook’s comments during his Listening Tour, including his concerns over regulation by enforcement, which many commentators took as a statement of his intention to pull back from the major sanction cases that have punctuated FINRA’s enforcement efforts over the past several years. This conjecture has drawn support from Cook’s stated intention to focus on boiler rooms and recidivist brokers, based on his belief that one of FINRA’s most important purposes “is to protect investors from bad actors . . . who seek to evade regulatory requirements and harm investors for their own pockets.” (Protecting Investors from Bad Actors, Robert W. Cook, June 12, 2017 at 1). Cook is a lawyer’s lawyer, and his record at the SEC and FINRA shows a deliberate and principled approach to regulation. On broad categories of cases, including anti-money laundering, system failures, compliance officer liability, and net capital calculation, he will no doubt want a full accounting of the conduct at issue, including whether the failures were deliberate and how the conduct varied from industry standards. However, where the evidence and law are clear, his actions today show that FINRA will not hesitate to take action.
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