This week the Wall Street Journal featured a special “Journal Report,” “The Future of Finance.” The Report included an article entitled "Where Financial Regulation Goes in a Republican Era." The article, which casts itself as a “closer look at the two main competing visions—and what they mean for consumers, institutions and the economy,” discusses what the authors perceive to be “opposing philosophies about free markets, regulation and the role of government.” On the one hand, there is the aggressive rule-making model, in which the government takes an active role in things like corporate decision making, loan-underwriting decisions, and conversations about retirement advice, all with the goal of protecting investors from risky investments and preventing another financial crisis. In counterpoint is a philosophy favoring freer markets and rolling back regulations that aren’t working as intended or were never really necessary.
It’s an interesting article that fairly presents the plusses and minuses of both positions without appearing to take sides. But the discussion is at a very general macro or philosophical level. Any changes in overall regulatory approach or focus are much more likely to come incrementally as proponents of each philosophical approach debate their relative merits in the context of specific rule changes and as other events intervene. So, regardless of which philosophy prevails, comprehensive regulatory changes are likely to occur, if at all, somewhere way down the road.
Perhaps more interesting to consider than current views on fundamental revisions as to how the markets are regulated – views that can change with each unforeseen significant market event or election – is what is happening at FINRA, the principal day-to-day regulator of broker-dealers. A few weeks ago, FINRA, with new President and CEO Robert Cook now at the helm, announced FINRA 360, “a comprehensive self-evaluation and organizational improvement initiative.” FINRA’s goal is “to ensure that FINRA is operating as the most effective self-regulatory organization (SRO) it can be, working to protect investors and promote market integrity in a manner that supports strong and vibrant capital markets.”
FINRA notes that it has been 10 years since NASD and NYSE Regulation merged to become FINRA, and that both FINRA’s member firms and the markets generally have changed significantly since then. Despite all of those changes, FINRA has yet to conduct a comprehensive, organization-wide self-assessment and improvement initiative, so FINRA has determined that this is now the right time for the organization to ensure that it is “optimally organized and managed as an SRO to achieve its mission of investor protection and market integrity for the next 10 years and beyond.”
As can be seen from the Special Notice that FINRA issued to coincide with the kickoff to FINRA 360, pretty much everything is on the table. FINRA is examining its organization and the operation of its regulatory functions; its use of data and technology to support efficient decision and policy-making; and the tools and metrics it uses to assess results and success across its regulatory programs and support functions. According to FINRA, this will not be a one-time assessment. Rather, it is intended to be a multi-year initiative with the goal of creating an organization committed to continuous improvement. Most importantly, FINRA is looking to be open to new ideas and to consider different perspectives with respect to how it achieves its mission.
Businesses are forced to review and assess their performance constantly to be sure they are performing at peak efficiency in a commercial sense and, in today’s world, with respect to applicable regulations. Regulatory bodies, on the other hand, sometimes appear to be less inclined to disrupt the status quo and to examine what they are doing and how they are doing it. It is unclear whether that’s because of a perceived need to maintain consistency in order to assure coherent regulation, or simply because such introspective review is not something regulators generally think of as necessary to accomplishing their mission; but it is refreshing to see a regulator taking a good hard look at how it does things, openly and in full view of the public, and asking those affected by what it does to participate in the process.
It will be interesting to see the kinds of comments FINRA receives, its responses to those comments and, ultimately, whether any significant, fundamental changes occur. It will also be interesting to see whether other regulators follow suit.