[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]



                       OVERSIGHT OF THE FINANCIAL
                     INDUSTRY REGULATORY AUTHORITY

=======================================================================

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON CAPITAL MARKETS,
                       SECURITIES, AND INVESTMENT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 7, 2017

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 115-39
                           
                           
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
STEVAN PEARCE, New Mexico            GREGORY W. MEEKS, New York
BILL POSEY, Florida                  MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri         WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
STEVE STIVERS, Ohio                  AL GREEN, Texas
RANDY HULTGREN, Illinois             EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida              GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina     KEITH ELLISON, Minnesota
ANN WAGNER, Missouri                 ED PERLMUTTER, Colorado
ANDY BARR, Kentucky                  JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania       BILL FOSTER, Illinois
LUKE MESSER, Indiana                 DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado               JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas                KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine                JOYCE BEATTY, Ohio
MIA LOVE, Utah                       DENNY HECK, Washington
FRENCH HILL, Arkansas                JUAN VARGAS, California
TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York              VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia            RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana

                  Kirsten Sutton Mork, Staff Director
      Subcommittee on Capital Markets, Securities, and Investment

                   BILL HUIZENGA, Michigan, Chairman

RANDY HULTGREN, Illinois, Vice       CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
PETER T. KING, New York              BRAD SHERMAN, California
PATRICK T. McHENRY, North Carolina   STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
ANN WAGNER, Missouri                 KEITH ELLISON, Minnesota
LUKE MESSER, Indiana                 BILL FOSTER, Illinois
BRUCE POLIQUIN, Maine                GREGORY W. MEEKS, New York
FRENCH HILL, Arkansas                KYRSTEN SINEMA, Arizona
TOM EMMER, Minnesota                 JUAN VARGAS, California
ALEXANDER X. MOONEY, West Virginia   JOSH GOTTHEIMER, New Jersey
THOMAS MacARTHUR, New Jersey         VICENTE GONZALEZ, Texas
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
TREY HOLLINGSWORTH, Indiana
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    September 7, 2017............................................     1
Appendix:
    September 7, 2017............................................    33

                               WITNESSES
                      Thursday, September 7, 2017

Cook, Robert W., President and Chief Executive Officer, Financial 
  Industry Regulatory Authority (FINRA)..........................     4

                                APPENDIX

Prepared statements:
    Cook, Robert W...............................................    34

 
                       OVERSIGHT OF THE FINANCIAL
                     INDUSTRY REGULATORY AUTHORITY

                              ----------                              


                      Thursday, September 7, 2017

             U.S. House of Representatives,
                   Subcommittee on Capital Markets,
                        Securities, and Investment,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 3:15 p.m., in 
room 2128, Rayburn House Office Building, Hon. Bill Huizenga 
[chairman of the subcommittee] presiding.
    Members present: Representatives Huizenga, Hultgren, 
Stivers, Wagner, Poliquin, Hill, Emmer, Mooney, MacArthur, 
Davidson, Budd, Hollingsworth; Sherman, Lynch, Scott, Himes, 
Foster, Meeks, Sinema, and Gonzalez.
    Chairman Huizenga. The Subcommittee on Capital Markets, 
Securities, and Investment will come to order. And without 
objection, the Chair is authorized to declare a recess of the 
subcommittee at any time.
    Today's hearing is entitled, ``Oversight of the Financial 
Industry Regulatory Authority.''
    I now recognize myself for 5 minutes to give an opening 
statement.
    Hardworking Americans rely on capital markets to save for 
everything from college to retirement. We, as Congress, must 
ensure that we have fair and effective regulation in order to 
maintain efficient capital markets so that all investors 
receive the greatest return on their investment.
    Today, as part of our oversight role, we will examine the 
Financial Industry Regulatory Authority, or FINRA. FINRA is an 
independent, not-for-profit organization authorized by Congress 
and registered with the Securities and Exchange Commission as a 
self-regulatory organization, or an SRO, that oversees the U.S. 
securities industries.
    FINRA's origins date back to 1939 when Congress authorized 
the National Association of Securities Dealers (NASD) as an SRO 
to protect investors and the public interest. The NASD and the 
NYSE regulation organizations merged in 2007 to form what is 
now FINRA.
    FINRA's mission is to protect investors and promote market 
integrity through writing and enforcing rules and regulations 
and examining broker-dealers for compliance with its rules, 
Federal securities laws, and the rules of the Municipal 
Securities Rulemaking Board. FINRA drafts, implements, and 
enforces the rules that govern the activities of more than 
3,700 securities firms and over 630,000 brokers, conducts 
investor education, registers securities firms, brokers, and 
mutual fund corporations, operates trade reporting facilities, 
provides realtime transaction and price data for corporate bond 
trades, and administers the largest alternative forum 
specifically designed to resolve securities-related disputes.
    As the primary regulatory authority for broker-dealers, 
FINRA plays an integral part in ensuring that capital markets 
are fair and efficient, while protecting investors and other 
market participants. However, some critics have noted that for 
the last decade FINRA has engaged in some mission creep and 
transformed itself from a traditional SRO into a quasi-
governmental regulator more akin to a fifth branch of 
Government, or as some have called it, the, ``deputy Securities 
and Exchange Commission.''
    While FINRA has regulatory powers that are similar to the 
SEC, it lacks mechanisms common to other Federal regulators 
that allow them to be held accountable to Congress and to the 
public.
    Since this committee last held a general oversight hearing 
on FINRA in 2015, FINRA has appointed Mr. Robert Cook as 
president and CEO, and there have been a number of significant 
changes that have taken place at FINRA.
    Earlier this year, FINRA announced that it is conducting a 
comprehensive self-evaluation and organizational improvement 
initiative called FINRA360. The goal of this effort is to 
ensure that FINRA is operating as the most efficient and 
effective SRO, while working to protect investors and promote 
market integrity in a manner that supports strong and vibrant 
capital markets. FINRA360--excuse me.
    Will the committee room come to order, please?
    Thank you.
    FINRA360 is a multiyear initiative focused on creating an 
organization that is committed to continuous improvement, and 
any changes will be implemented in phases rather than waiting 
until all areas of inquiry have been fully addressed. As part 
of FINRA360, Mr. Cook has engaged in a ``listening tour'' with 
member firms, investors, investor advocates, regulators, trade 
associations, and FINRA employees, among other stakeholders, 
about what FINRA is doing well and what it could do better. I 
congratulate you on that effort.
    Another initiative that took place earlier this year and 
was discussed during our July 14th hearing on fixed income 
market structure is the Trade Reporting and Compliance Engine, 
or TRACE. By working closely with the Treasury, the Federal 
Reserve, and the FCC, FINRA launched TRACE for member firms to 
report transactions, post-trade, in U.S. securities. For the 
first time ever, TRACE provides regulators with regular 
transaction information for this very important market.
    Today, we welcome the testimony of Mr. Cook, which will 
give us an opportunity to examine the work that FINRA is doing 
to streamline and improve its operations so as to better serve 
the broker-dealer community and its customers while ensuring 
market integrity and facilitating vibrant capital markets.
    The Chair now recognizes the gentleman from California, Mr. 
Sherman, for 5 minutes for an opening statement.
    Mr. Sherman. Our fine ranking member, Mrs. Maloney, has to 
be at the White House for a small group meeting with President 
Trump. I am sure that as a result of that meeting, the 
President will want to fully fund absolutely every tunnel 
between New Jersey and New York. And given her persuasive 
abilities, he will probably also want to fund the new start 
through the Sepulveda Pass, a subway in my district--or 
affecting my district. She is very persuasive. In fact, she has 
persuaded me to note for the record that FINRA is a self-
regulatory organization that was originally created in 1938 by 
the superbly named Maloney Act.
    I do not have a full 5 minutes of material here. I will 
yield to any colleague on our side who wants some time, or I 
will try to stretch out what material I do have.
    I will point out that the chairman has well described the 
importance, history, and role of FINRA. In 2016 alone, FINRA 
referred 785 matters to the SEC for possible enforcement. And 
that, I think, demonstrates quantitatively the important role 
that they play.
    I want to review a few matters. Wells Fargo employees were 
put under incredible pressure. Any time someone leaves Wells 
Fargo, a form U5 needs to be created. Some of those U5s 
indicate that the employee was terminated for creating 
unnecessary and unasked-for checking or credit card accounts. 
These employees were put under pressure from on high in their 
bank. And I am pleased to note that FINRA has a system for 
going through what I believe is just 207 employees whose U5s 
indicated they were terminated by Wells Fargo as part of this 
scandal. And I hope that you will treat those employees 
appropriately.
    I would point out that investment companies need to pay 
processing fees that pay for the delivery of shareholder 
reports and proxy materials through accounts held by brokers. I 
would hope that FINRA would take the lead in making sure that 
these processing fees are not excessive. They can't really be 
negotiated. And I look forward to learning how the fee is 
reasonable and how we move forward to electronic delivery where 
appropriate. The best way to reduce the fees and costs is to 
reduce the amount of work that needs to be done.
    I would point out that FINRA retains moneys collected in 
fines. I believe that last year you collected $173.8 million in 
fines. About $27.9 million of that was given to investors as 
restitution, leaving almost $150 million for FINRA to spend on 
certain limited projects.
    And I want to make sure that we are not creating a conflict 
of interest. I have seen where you tell local law enforcement: 
Go out and enforce drug laws, and you get to keep the property 
you seize. Seizing the property seems to be the objective. And 
we will want to be sure that FINRA is making the right 
decisions, and also that if the right decision is to retain 
$150 million, that money is being spent for the benefit of 
investors.
    I think that covers my initial comments. And for the first 
time ever, I will yield back with time on the clock.
    Chairman Huizenga. Duly noted.
    With that, I would like to take this opportunity to welcome 
Mr. Robert Cook, President and CEO of the Financial Industry 
Regulatory Authority (FINRA).
    You will be recognized for 5 minutes to give an oral 
presentation of your testimony. And without objection, your 
written statement will be made a part of the record.
    Mr. Cook has a long history involved in this space. From 
2010 until 2013, he served as the Director of the Division of 
Trading and Markets of the U.S. Securities and Exchange 
Commission. Prior to that, he was a partner based in the 
Washington, D.C., office of an international law firm where 
during his years of private practice he worked extensively on 
broker-dealer regulation advising large and small firms on a 
wide range of compliance matters.
    Mr. Cook earned his JD from Harvard Law School in 1992, a 
master's of science in industrial relations and personnel 
management from the London School of Economics in 1989, and an 
AB in social studies from Harvard College in 1988.
    With that, Mr. Cook, we welcome you here. We thank you for 
your time and your patience. We are a little behind where we 
had hoped, but as I was taught by one of my Michigan mentors, 
John Dingell, it was due to, as he called it, ``the tyranny of 
the vote.'' It doesn't matter what plans you have; as soon as 
they ring those bells, we have our constitutional 
responsibility that we need to fulfill. So we appreciate your 
patience in being here. And with that, you are recognized for 5 
minutes.

  STATEMENT OF ROBERT W. COOK, PRESIDENT AND CHIEF EXECUTIVE 
    OFFICER, FINANCIAL INDUSTRY REGULATORY AUTHORITY (FINRA)

    Mr. Cook. Thank you, Chairman Huizenga, Ranking Member 
Maloney, Congressman Sherman, and other members of the 
subcommittee. Thank you for this opportunity to testify before 
you for the first time as the CEO about FINRA's operations and 
regulatory programs and how we are protecting investors and 
ensuring market integrity while facilitating vibrant capital 
markets.
    As you have noted, FINRA plays a critical and active role 
in the continued strength of the U.S. capital markets. Working 
closely with the SEC, it is the first line of oversight for 
thousands of broker-dealer firms and individual brokers. FINRA 
operates a comprehensive surveillance and examination program 
to protect investors and the markets.
    While the SEC has always closely supervised us, last fall 
they enhanced their supervision by establishing the FINRA and 
Securities Industry Oversight, or FSIO, office with roughly 45 
staff members who conduct comprehensive reviews of our 
operations. We welcome this extensive oversight, which is 
central to the effectiveness of the self-regulatory structure 
established by Federal statute.
    This subcommittee is another important part of our 
oversight. We welcome your ongoing work and hearings to address 
the many complex challenges facing the market structure of the 
equities in fixed-income markets, including the $14 trillion 
market for Treasury securities.
    As you have mentioned, we recently implemented trade 
reporting for U.S. Treasuries, working with the Department of 
the Treasury, the SEC, and the Federal Reserve Board. This 
initiative leveraged TRACE, FINRA's existing corporate bond 
trade reporting system, to limit the burden on the industry and 
to promote regulatory transparency in this vital market at no 
cost to taxpayers.
    TRACE for Treasuries is a good example of how FINRA can 
serve investors and the markets effectively and efficiently. In 
that vein, it is vital that we understand what FINRA does well 
and what we can do better. That is why shortly after joining 
FINRA, I embarked on a listening tour, as the chairman noted, 
to meet the broad range of stakeholders and hear their 
different perspectives on those questions.
    This tour is ongoing. It really needs to be in the DNA of 
an SRO to be constantly listening. But I have already received 
important feedback from across the country. Informed by these 
discussions, we have undertaken a range of new initiatives 
described in my written testimony, a few of which I will 
highlight now.
    One is FINRA360. This year is FINRA's 10th anniversary, 
and, with that, I introduced FINRA360 as a multiyear initiative 
designed to take a fresh look at our operations and to 
determine how we can more efficient and effective as a 
regulator.
    One of our first actions was to issue a request for comment 
on how we engage with our member firms, investors, and other 
stakeholders. We received many helpful comments and are in the 
process of identifying changes that will help us to be a better 
SRO. For example, just yesterday we launched a FINRA web page 
with more information on our board's operations to provide 
greater transparency on our priorities and our goals.
    Also, as a direct result of FINRA360, we recently combined 
two distinct enforcement teams into one unit under a new head 
of enforcement who reports directly to me. The unified 
structure will improve our ability to streamline investigations 
and provide a more coordinated and consistent approach to 
oversight.
    Other results from FINRA360 include planning the first-ever 
publication of common examination findings to educate firms and 
facilitate compliance, identifying additional compliance tools 
and resources that FINRA can provide to assist smaller firms, 
and launching an innovation outreach initiative to help FINRA 
better understand FinTech and to help firms that wish to use 
FinTech.
    In its first months, FINRA360 is already making us better, 
and we will continue to make additional improvements in the 
coming year.
    Beyond FINRA360, we have worked to strengthen our core 
regulatory programs and to enhance protections for investors in 
the markets. We have advanced new initiatives to better 
identify high-risk brokers and to stop bad actors who put 
investors at risk. We have requested public comment to update 
our programs to enhance the capital-raising process, including 
private securities transactions, while maintaining important 
investor protections.
    We finalized a tailored set of rules for firms with a 
specific business model that supports capital formation. We 
have used the Cloud to more efficiently execute our 
surveillance of more than 37 billion market events each day, 
enabling us to respond more effectively and more quickly to 
potential misconduct and to dynamic market conditions.
    Last, but not least, senior issues and investor protection 
are our priority. In 2015, FINRA launched a helpline that takes 
calls and investigates issues for investors. To date, we have 
received over 10,000 calls, and, as a result of this program, 
firms have voluntarily returned nearly $4.7 million to 
customers.
    In addition, we recently finalized a new rule to enable 
firms to put a temporary hold on a disbursement of funds or 
securities in a senior investor's account when there is 
reasonable belief of financial exploitation. This rule appears 
to complement the key work that this committee is doing to 
protect seniors and vulnerable investors through the Senior$afe 
Act. We welcome this opportunity to work with you to provide 
this important safety net for seniors. To ensure that there are 
no regulatory gaps in the Senior$afe Act's coverage, FINRA 
respectfully requests to be added to the bill's scope.
    As you are aware, FINRA's work extends far beyond these 
initiatives, and I am constantly impressed by the dedication 
and talent of FINRA's employees who work tirelessly every day 
to fulfill our mission. But FINRA's ongoing success requires 
that we strive for continual improvement, and, like our 
members, are always adapting to market conditions. I believe 
the major initiatives of this past year, particularly FINRA360, 
will propel us to face the challenges ahead.
    But we must continue to work to stop conduct that is 
harmful to investors and markets. We must ensure our regulatory 
operations are appropriately risk-based and running as 
efficiently as possible. We must continue to innovate and to 
lead in our use of technology to support cross-market 
surveillance. And we must continue to work to recognize the 
diversity of our members, including smaller broker-dealers, and 
avoid a one-size-fits-all oversight program.
    We are in the middle of a self-assessment and 
organizational improvement exercise that we hope will 
facilitate transformational change at FINRA. As we continue 
this exercise, we must remain firmly focused on our core 
mission of protecting investors and market integrity while 
promoting vibrant capital markets.
    I look forward to working with Congress and other 
stakeholders to further these important goals. I thank you for 
your time, and I am happy to answer any questions you may have.
    [The prepared statement of Mr. Cook can be found on page 34 
of the appendix.]
    Chairman Huizenga. Thank you. I now recognize myself for 5 
minutes for questions. And I want to hit on two things. One, I 
want to unpack a little bit of some of the things that you have 
been doing with FINRA360.
    But first, I want to start off with this. I, and many 
others on this committee, have expressed real concern about the 
decline in the number of companies seeking to go public in the 
last number of years. And the SEC Chairman, Jay Clayton, has 
noted that capital formation and making public capital markets 
more attractive to businesses while providing appropriate 
safeguards for investors is a top priority.
    And I am curious, how can FINRA help with this goal, to 
help make going public as a company easier and more attractive 
for smaller businesses? And then how can it encourage other 
types of capital-raising activities other than going public?
    Mr. Cook. Thank you, Mr. Chairman. We agree this is an 
essential goal that we share with you to help take every step 
we can to promote capital formation. We recently issued a 
request for comment on all of our rules that relate to capital 
raising so that we could take a holistic approach and find out 
from all industry participants and other interested parties 
which of our rules can we take a fresh look at in order to help 
promote capital raising.
    Chairman Huizenga. What is the timeframe of that? How long 
ago was that request?
    Mr. Cook. It was this year that we issued it. I don't know 
exactly how many months ago, but it was a number of months ago. 
We have the comments in.
    Chairman Huizenga. Okay. So that comment time is closed?
    Mr. Cook. Comments are closed. But it is not too late for 
anyone who wants to give us more comments on that. So we are 
taking a look at that.
    We have also just this year finalized or made operational a 
new tailored rule set for brokers whom we call capital 
acquisition brokers, who are engaged primarily in private 
capital raising, to give them a more streamlined and tailored 
set of rules to comply with. That became final in April. We 
already have 30 of these so-called capital acquisition brokers 
who have registered with us.
    We helped to implement the rules relating to funding 
portals that were mandated by the JOBS Act, and working under 
the SEC rules we helped facilitate that. We now regulate a 
number of funding portals.
    So I think we are taking a fresh look at our rule book, and 
we are eager to work with the SEC where we can.
    Chairman Huizenga. So let me, same coin, different side 
here, what can we do here in Congress to help encourage that? 
Do you see it as a problem, this decline in IPOs and publicly 
traded companies?
    Mr. Cook. I think it is a concern that we need to be 
focused on. We think there are probably many factors driving 
it, but we want to make sure that where regulation may be a 
driver, we are thinking about whether that regulation is 
appropriately calibrated.
    When I talk to folks in the industry, things I hear about 
include possibly raising some of the limits on the funding 
portals to allow them to be able to raise more money. That is 
one set of comments we got back.
    By the way, I should mention, on our comment period for the 
capital formation, a number of comments came in that actually 
don't relate to FINRA rules; they are more SEC rules or 
Congress. I would be happy to share with you the types of 
feedback we got from that.
    Chairman Huizenga. Please. Let's call that 
CapitalMarkets360. So, we are happy to do that.
    Okay. On your FINRA360, you have been meeting with these 
stakeholders. Is there any kind of industry consensus on 
improvements that can be made at FINRA? What has been your 
response so far?
    Mr. Cook. I think as part of the listening tour and the 
engagement notice where we asked anyone interested to share 
with us their views on how we engage with the world around us, 
we have gotten a lot of comments. And that is in part why we 
created FINRA360, because we needed a process to evaluate those 
comments and think carefully, how do we respond to this concern 
or this criticism in a way that will better facilitate investor 
protection?
    A number of the comments relate to internal organizational 
issues at FINRA and how that translates into the impact that we 
have on our member firms. So, for example, as I mentioned, we 
had two enforcement programs historically. And sometimes member 
firms experienced those as if they were two different 
regulators. And so that was one of the comments that we got, 
and we have combined those.
    There were other comments about our organizational 
structure, how we interact with firms. We hear things that 
firms think we do well, and we need to focus on how we can do 
more of that and do that more consistently.
    Chairman Huizenga. I have 30 seconds left. On page 6 of 
your oral statement, you listed a couple of things that you 
were working on. You said you have advanced new initiatives to 
better identify high-risk brokers and stop bad actors who put 
investors at risk. I am curious, what are those new 
initiatives, quickly?
    And then, that you had finalized a tailored set of rules 
for firms with a specific business model that support critical 
capital formation.
    So, 5 seconds.
    Mr. Cook. Focusing on high-risk brokers is an integral part 
of our examination program. We attack that through multiple 
dimensions. The newest elements of it are to create a 
specialized examination unit just to make sure we are using 
data and analytics carefully to identify high-risk brokers and 
to facilitate our examination and oversight of them.
    In addition, our board in the last two meetings has 
approved a series of additional rule amendments to give us 
greater authority to deal with high-risk brokers or to target 
activities that we think may be high risk, including, for 
example, the possibility that if you have a lot of disciplinary 
events in your background and someone wants to put you in 
charge of a firm, that you would have to--FINRA would have more 
opportunities to review that first.
    In the testimony, you asked about the tailored rule set. 
That is really the capital acquisition brokers rule set that we 
went live in April of this year for those brokers who are 
primarily engaged in M&A transactions, private equity-type 
transactions. It is a new initiative creating a tailored rule 
book to a specific type of firm. These generally are smaller 
firms. I think we are going to need to look at that and see 
whether we have gone far enough and whether there is more we 
can do.
    Chairman Huizenga. Thank you very much.
    And with that, the gentleman from California is passing off 
to the gentleman from Massachusetts for 5 minutes of 
questioning.
    Mr. Lynch. Thank you, Mr. Chairman.
    I want to thank you, Mr. Cook, for appearing before the 
subcommittee and helping with our work.
    Given the recent attention placed on best execution and 
conflicts surrounding the payment of rebates to brokers, I was 
wondering if FINRA will actually dive in and investigate best 
execution, and specifically whether the conflict within the 
maker-taker rule is leading to suboptimal order routing by 
brokers?
    Mr. Cook. Thank you, sir.
    Best execution is a vital part of ensuring that customers 
are getting the best prices and that brokers are not biased in 
how they execute customer orders.
    Mr. Lynch. That is how it is supposed to work, but that is 
not how it is working right now.
    Mr. Cook. FINRA has done a number of things in the best 
execution space. The general question of rebates and maker-
taker, the SEC's Equity Market Structure Advisory Committee has 
been looking at that and there are calls for a pilot to look 
more closely at that.
    In the meantime, we have been trying to focus on best 
execution. We have issued further guidance for firms about best 
execution. We have conducted a sweep in reviewing a firm's best 
execution practices. And we are anticipating doing more 
examination and surveillance work, it has been a high priority 
on our priorities letter, to focus on how firms, not just how 
they make the decisions, but how they quantify the benefits to 
customers of the routing decisions that they are making.
    Mr. Lynch. I have a bill that would set up a pilot as well. 
But we have been unsuccessful thus far.
    Let me ask you, there have been already several high-
profile enforcement actions taken by the SEC, by yourself at 
FINRA, and by the New York Attorney General's Office against 
broker-dealers who are operating their own alternative trading 
systems (ATS). And while you have brought actions against them, 
you haven't called them out or introduced any enforcement 
action based on their violation of best execution. Is there a 
reason for that?
    Mr. Cook. I think a number of those cases that have come 
out have been focused on the disclosure that was provided by 
broker-dealer operators of trading venues and whether those 
were consistent with how customers' orders were actually being 
handled as opposed to focusing on best execution. However, how 
brokers handle best execution, including in the context of 
ATS's that they run, is a focus of our examination program, and 
we expect to be bringing forth some more guidance and action in 
that area.
    Mr. Lynch. Okay. I just want to caution you that the magic 
of our system, what makes it work, is there is a general 
feeling that the system is legitimate, that there is integrity 
there, that people can rely on best execution, that their 
orders are not being manipulated. That is not what is 
happening. And I am just worried about the reputational damage 
that is going to be caused if the current practices continue.
    Let me ask you, as reported by Reuters, FINRA makes data 
available on individual broker's backgrounds, including 
complaints and sanctions against them, through its BrokerCheck 
website. However, you reportedly will not release the data in 
bulk, such as a database that would enable investors and 
interested researchers to identify whole brokerage firms with 
high concentrations of brokers with a history of FINRA rule 
violations.
    What is the reasoning behind that, that we can't get the 
data, everything is individual broker?
    Mr. Cook. It is an area we are looking at. Historically, 
the system has been set up to focus on allowing customers to 
look at their broker. And over time, I think collectively we 
are realizing there is more--there is potential opportunity in 
having them be able to see patterns in their firm. So we have 
changed our policy on allowing folks to scrape information from 
our website so that they can pull down that type of 
information.
    We are also looking at whether there are packages of data 
that we could make available to researchers and others to help 
facilitate.
    Mr. Lynch. I just worry--my time is short here--but if I 
wanted to avoid a firm that was toxic and that had a large 
number of brokers who were violating your rules, I wouldn't be 
able to do that. You don't give me the information to do that 
right now in the current form. And I would just ask to you 
provide that greater protection to investors and parties that 
want to hold some of the bad actors accountable.
    Again, I have exceeded my time. I yield back. Thank you.
    Chairman Huizenga. The gentleman yields back.
    The Chair recognizes the gentleman from Maine, Mr. 
Poliquin, for 5 minutes.
    Mr. Poliquin. Thank you, Mr. Chairman.
    And thank you very much, Mr. Cook, for being here.
    Mr. Cook, I represent the rural part of Maine. They are 
probably the most hardworking people you can ever find. We have 
about 3,000 miles of coastline and thousands of lakes and ponds 
and hundreds of mile of rivers. And we have effectively lost 
our industrial base over the years because of, frankly, poor 
public policy when it deals with taxes and regulations and 
other issues.
    But we are now a district of small savers and small 
businesses. I think 70 or 80 percent--and I won't get this 
exactly--but 70 or 80 percent of our businesses in Maine employ 
less than 20 people. So I am very concerned about making sure 
two things happen for our families in Maine such they can 
easily save for college or retirement and make sure they have 
better lives for their families.
    So, two things, one of which the chairman just mentioned 
that dealt with why is it that only about half the number of 
companies today choose to go public as compared to 10 years 
ago? I think that has been addressed and likely will continue 
to be addressed here today.
    I would like to focus on the second issue, if I can, Mr. 
Cook. Last year, as you well know, the Department of Labor, not 
the Securities and Exchange Commission, but the Department of 
Labor, got involved in a series of regulations called the 
fiduciary rule dealing with our broker-dealers to, in my 
opinion, impose an unnecessary set of new regulations on that 
part of our financial services community.
    Now, if you are a teacher in Lewiston or you are a mechanic 
in Bangor or you are a lobster fisherman in Downeast Maine, you 
need to make sure you have access to financial advice, whether 
it be your insurance agent or your financial adviser who is 
helping you plan for retirement or what have you. And I am very 
concerned that because of these unnecessary regulations, a lot 
of folks are starting to leave that industry.
    So, what do you do with someone who has worked for 20 or 30 
years and has a nest egg, which is what they are counting on, 
but now are unable to get asset allocation advice or do I buy 
an annuity or not or what stocks or bonds do I invest in, and 
mutual funds, and so forth and so on?
    So my question to you, sir, is, have you seen this among 
your members, where there are a number of firms that are just 
not providing advice anymore to small savers and investors that 
would have a huge impact on the folks that I represent?
    Mr. Cook. Thank you, Congressman, for that question. And as 
a son of--a product of rural Vermont, a neighboring State, I--
    Mr. Poliquin. I am not sure I would be proud of that, sir. 
Vermont has no coastline. And I am sure it is a great place to 
live, but I would hope that your family would consider moving 
to Maine where you belong.
    Mr. Cook. Thank you, sir.
    As has been mentioned, I have been going on an ongoing 
listening tour. I have done 12 roundtables around the country, 
meeting with small firms. Yes, one of the concerns I do hear 
from small firms is about how they will comply with the DOL 
rule. And so that is, especially in a small firm space, I 
think, an area of concern.
    Our view is it would be helpful for investors to have a 
uniform standard here so that whether you are going in for an 
IRA account or a non-IRA account or broker investment adviser, 
that small investor has a nest egg.
    Mr. Poliquin. Is there confusion now because of this DOL 
rule that is outstanding?
    Mr. Cook. Excuse me?
    Mr. Poliquin. Is there confusion now among the broker-
dealers in our industry because of this DOL rule that is--
    Mr. Cook. Frankly, I think it is because of the different 
standards that have developed up over time even before the DOL 
rule. We have the broker rule. We have the adviser rule. There 
are just different--you need a law degree to even know what the 
open issues are.
    Mr. Poliquin. Tell us a little bit, if you don't mind, 
about just the FINRA activities, not those related to the 
fiduciary rule. What sort of regulations do you put in place, 
what sort of process do you have in place, to make sure that 
your members' customers are treated fairly when it comes to 
conflict of interest?
    Mr. Cook. We have extensive rules that all of our members 
are subject to, suitability requirements, there is particular 
conflict of interest disclosure requirements they have to make.
    And so on top of that rule set, we also have a robust 
examination program. So it is not just an honor code that they 
follow, but we come in and examine and surveil followed by 
enforcement. And that includes everything related to 
suitability, to supervision, to conversion of customer funds.
    Mr. Poliquin. Do you find that your members sense this 
confusion, this additional confusion entered into your space, 
that the number of orphaned accounts, the number of accounts 
that are no longer receiving good, sound financial advice has 
increased?
    Mr. Cook. I don't have a sense for numbers or really--I 
only have anecdotal views that I have heard. I can't really say 
how widespread any of this is.
    But, again, I think there is an issue here that goes prior 
to the DOL rule about people having different regimes, being 
subject to different regimes, based on the regulatory 
requirements.
    Mr. Poliquin. Thank you, Mr. Cook, for your good work, and 
I appreciate you being here today.
    Thank you, Mr. Chairman. I yield back.
    Chairman Huizenga. The gentleman's time has expired.
    With that, the Chair recognizes the gentleman from 
California, Mr. Sherman, for 5 minutes.
    Mr. Sherman. Thank you for being here, Mr. Cook. As I 
previewed in my opening statement, are you willing or at least 
open to having FINRA take over responsibility from the New York 
Stock Exchange for setting and overseeing the processing fees 
that funds pay for the delivery of shareholder reports and 
proxy materials to accounts held through brokers?
    Mr. Cook. That is a question that we have been focused on. 
We think the best approach there to figure out what is going on 
and what the issues are is to get all the parties together and 
have a dialogue around this so we can figure out what the best 
regulatory solution would be.
    So, ultimately, we think it would be useful to have the 
SEC, us, the providers of these proxy services, the mutual 
funds, have a conversation around this and figure out what the 
best approach is.
    Mr. Sherman. I hope you will try to reduce the cost to the 
funds and ultimately to the investors. One way to do that is to 
have a regulated fee that is as low as it can be. Another is to 
go to the SEC or to Congress and identify those reports that 
should be delivered electronically rather than through mail.
    Rule 2232 is going to require dealers to begin reporting to 
their retail customers the amount of markup or markdown on most 
secondary transactions and corporate bonds. The rule changes 
are going to take effect in May of next year. However, many 
dealers subject to the rule are concerned about meeting the 
deadline, in part because there is no turnkey vendor with 
compliance solutions that is available today. Are you 
considering extending the implementation date for this rule?
    Mr. Cook. Thank you. So we are engaged closely with the 
industry, representatives of the industry, to understand what 
the implementation challenges are around this rule. 
Fundamentally, the rule is intended to give investors more 
disclosure, more information, so they can make more informed 
decisions. But we recognize that there are some challenges that 
firms need to focus on in order to implement.
    We have been coordinating closely with the MSRB, which has 
a parallel rule, and conversations with the SEC. We have issued 
some guidance that we think will be helpful. But we are looking 
at whether there may be more guidance that we could provide, 
including based on whether a vendor concept develops that would 
help firms with the operational aspects.
    Mr. Sherman. Thank you. In my opening statement I talked 
about the $173-plus million you receive in fines. Are you 
considering returning a greater percentage of the money to the 
investors? And does FINRA intend to make a more robust, 
meaningful public report on how it uses these fine moneys?
    Mr. Cook. The fine moneys that we collect are an important 
part of funding important investor protection initiatives. They 
fund capital initiatives, strategic initiatives. For example, 
the TRACE for Treasuries platform that we developed at no cost 
to taxpayers, that type of technology investment is made 
possible by things like the fine moneys.
    The fines go up and down every year. Last year was a large 
year. But to the extent there is a value in us providing more 
insight into how we are using the fine moneys, I am very open 
to--
    Mr. Sherman. I would hope that you would furnish this 
committee and the public with a report. It is not exactly 
taxpayer money, but it is money collected in fines. All of the 
other fines are imposed by government and we think of it as 
government money, although it is not collected from taxpayers. 
And when any government agency is spending money that has come 
into the government's hands, Congress usually likes to get a 
pretty good report.
    You have a system where you are going to be--you have the 
Consolidated Audit Trail. You are going to have personally 
identifiable information, including Social Security numbers, 
addresses, dates of birth. What is FINRA doing to protect this 
information gained from this Consolidated Audit Trail program 
to make sure that it is not hacked?
    Mr. Cook. Thank you, sir.
    The Consolidated Audit Trail, which was approved by the 
SEC, FINRA was a bidder to be the processor for that, to be the 
collector of that information. We were not chosen as the party 
to do that. So FINRA is not the party collecting the PII. Under 
the plan approved by the SEC--
    Mr. Sherman. You have a particular company involved. And I 
don't know what record do they have. How have they convinced 
you that they are going to keep this information private?
    Mr. Cook. It is a private company. It contracts with the 
consortium of exchanges to provide this service. I think under 
the plan they have obligations to keep this information 
private. But it is a work in progress, and I can't give you any 
assurances at this point about it.
    Mr. Sherman. You don't want to be back here explaining why 
a million investors have had their public information--
    Mr. Cook. No, I don't. It is not a FINRA program, though, 
and FINRA is 5 percent of the voting committee that runs this. 
So I do think it is a good question for this committee, but it 
is not a FINRA.
    Mr. Sherman. You are 5 percent of the committee. I am zero 
percent of the committee. Please don't come back here to tell 
us--
    Mr. Cook. We all share that interest. Thank you.
    Chairman Huizenga. The gentleman's time has expired.
    The Chair recognizes the gentleman from Arkansas, Mr. Hill, 
for 5 minutes.
    Mr. Hill. Thank you, Mr. Chairman.
    Mr. Cook, I'm glad to have you before the committee. One of 
my favorite expressions over the years was when William O. 
Douglas was SEC Chairman. He said that self-discipline is 
always more welcome than discipline imposed from above. And he 
was a pretty big supporter of the self-regulatory organizations 
that were set out by the SEC during his term in office.
    It occurs to me, though, that sometimes it is hard to 
distinguish between what the SEC is supposed to do and what an 
SRO is supposed to do. And at the end of the day, do you 
consider yourself a wholly private actor or a state actor with 
authority from the government when you think about your job as 
CEO?
    Mr. Cook. I think we are a combination that is created by 
Congress to achieve a certain purpose, which is to facilitate 
regulation of the markets through active engagement with the 
industry, drawing on their expertise, not using taxpayer money, 
not making the government bigger, but at the same time doing it 
in a way that ultimately serves investors.
    So how do you achieve that balance? And I think that is 
part of the governance structure we have, which is that we have 
industry representatives on our board, we have industry 
participation on our committees, balanced by public 
representatives on our board and careful SEC oversight.
    So I think we--we and the other 33 SROs in the securities 
industry, because we are not the only SRO out there obviously--
have been created to undertake this task of achieving an 
important investor protection mission, but doing it by working 
closely and collaboratively with the industry where we can.
    Mr. Hill. Just because you do so much that is directly 
related to the safety and soundness of our markets, it speaks 
to the issue, do we have only to look to the Commission or can 
we, since you do have that public responsibility, have you 
submit cost-benefit analysis to us or be subject to the Freedom 
of Information Act and basic oversight type structures that we 
have for other public actors? What is your view on that?
    Mr. Cook. I think as an SRO--none of the SROs are subject 
to some of those requirements. And I think the question is, 
what do we want to get out of the SRO model? And will these 
requirements or these ideas help facilitate that or undermine 
it?
    I am concerned that if we try to make FINRA look more like 
the government, that is what we will get, and we may lose 
certain of the benefits of an SRO model.
    However, I think it is also important that we be subject to 
close oversight. And as I mentioned in my testimony, the SEC 
has enhanced its oversight of us and is engaged in 
significant--we have had 24 inspections since the beginning of 
last year. We have 39 targeted oversight exams. So there is a 
lot of SEC oversight of us today.
    Mr. Hill. Do you really think there is much ``self'' in the 
self-regulatory part left after all the court cases of the 
1990s and the SEC changes in the direction of FINRA? Is there 
much ``self'' left if you are a broker-dealer or someone who 
used to be deeply involved in the whole oversight of FINRA, in 
a true SRO-type model?
    Mr. Cook. I think it has evolved, for sure. But I think 
that there are reasons why it evolved. The changes you are 
talking about that happened in the 1990s were because the SEC 
determined that there was undue influence in the industry in 
this model that was subordinating investors' interest to public 
interest.
    And so there is a recalibration that happened then, but 
there is still significant involvement by the industry in our 
activities. And one of the challenges I have is to constantly 
make sure we got that calibration right. And I think every day 
we have to be asking ourselves, number one, are we holding the 
industry accountable? And, at the same time, are we 
collaborating with them as much as we can? And I don't think 
that job is ever going to end. I think we are always going to--
that is a tension that we have to live with.
    Mr. Hill. I appreciate that.
    I want to echo Mr. Sherman's concern about the Consolidated 
Audit Trail, which is not your responsibility. It is the 
Commission's. And the Commission has a contractee to do that. 
But we had a lot of data security concerns when FINRA proposed 
CARDS, which you remember, before your time.
    But I am concerned that--I am interested in your view. Is 
the plan to go to the Consolidated Audit Trail ready for 
primetime? Should the Commission delay the implementation of 
the Consolidated Audit Trail?
    Mr. Cook. I think there has been a lot of delay so far. So 
it is challenging to think about more. But the issue of PII 
that you have raised is significant, and we need to make sure 
that appropriate protections are in place to protect that data.
    And the question of whether you need the PII or not might 
be one that could be asked, and what are the alternatives to 
getting it, including might there be other ways of identifying 
significant traders in the market, like a large trader ID, 
without having to collect grandma's Social Security number when 
she only trades once or twice.
    Mr. Hill. Good comment.
    I yield back, Mr. Chairman. Thank you for the time.
    Chairman Huizenga. The gentleman's time has expired.
    The Chair recognizes the gentleman from Georgia, Mr. Scott, 
for 5 minutes.
    Mr. Scott. Thank you very much.
    Mr. Cook, you have great expertise in investor protection. 
Two points I would like to ask you.
    First of all, I think you all have a toll-free number for 
seniors. And that is one group that I have been very concerned 
about. I was a cosponsor with Ms. Sinema on the Senior$ave Act 
that you mentioned in your testimony.
    For a moment on that, could you acquaint us with how this 
toll-free line works? My major concern is that oftentimes we 
allow our technology to get ahead of us. And oftentimes we 
think we are helping, but we look out and you have robots 
calling people. And could you tell us, are all of these toll 
lines manned by human beings who can interact with the seniors 
and not automation?
    Mr. Cook. Absolutely, sir. Yes, especially when we are 
dealing with a population who may not necessarily be 
comfortable with technology.
    Mr. Scott. Right.
    Mr. Cook. No. We have staffed this with live people. We 
track wait times, and they are quite low. And this is a toll-
free number that anyone can call. Frankly, we get calls from 
people--we have had calls from every State in the country, 
people ranging from 17 years old to 102 years old, but the 
average is in the 70's, I believe. And then we follow up and 
try to figure out what their issues are. Often, we are making 
referrals to adult protective services or talking to the firm.
    And this has actually been a very collaborative approach 
with the industry. Many large firms have established a key 
contact person so when we see an issue, we can go to them and 
they will help us work through and resolve it.
    Mr. Scott. Okay. Let me go to another concern while I have 
your investor protection hat on. I know you didn't mention the 
fiduciary rule in your testimony, but I would like to pick your 
brain on this for a second.
    I have been involved in this issue for quite a while and I 
have been urging the SEC to come up with a uniform rule, one 
uniform rule and standard that could be applied. I think their 
failure to do so has put us in a difficult position.
    Now, you have the Department of Labor, you have the SEC, 
and to some degree even Treasury, with all of these other 
rules.
    So could you walk us through all the different varying 
standards, DOL versus the SEC, and I don't know if Treasury is 
coming up with it, and tell us how this complication is making 
it even more difficult in terms of protection? Could you share 
how significant and how important it is for us to get a uniform 
standard?
    Mr. Cook. First of all, let me say we support a uniform 
standard as well. We think that would be most helpful and, 
frankly, understandable by investors. And we are willing to 
work with all the relevant agencies to help support that.
    Today, I believe you have essentially three different 
standards: you have the ERISA fiduciary standard, to the extent 
that you are dealing with qualified retirement accounts subject 
to ERISA; you have the broker-dealer standard, which involves 
FINRA oversight compliance with FINRA rules, suitability, and a 
whole range of other requirements; and then you have the 
investment adviser fiduciary duty arising under the Federal 
securities laws. Each one of these was developed in different 
contexts. And for an investor--my mother is a retired investor 
living on a small nest egg. I couldn't begin to--her account is 
with a broker. I don't even want to try to explain to her how 
these different rules might impact her in different ways. It is 
very complicated.
    Mr. Scott. Yes. What do you think it is going to take to 
get that harmonization? And what do you predict the level of 
confusion's escalation will be for our failure as a Financial 
Services Committee? Our committee has that jurisdiction to 
hammer into these agencies, they have to harmonize, they have 
to come up with something. What do you think it is going to 
take to get that to happen?
    Mr. Cook. I am not sure. I think there is an opportunity 
now in some ways that maybe hasn't existed before. I think 
there is an opportunity, because I often hear from our member 
firms that they really want to see something happen here and 
want to promote a uniform standard, because they are the ones 
on the business end of it, so to speak. They have to explain to 
customers the different standards that they might be subject 
to. And so I think that--and the SEC has put out, opened up a 
comment file to address this issue. I think there is an 
opportunity for the SEC and the DOL to work together on this, 
and we would offer to be as constructive as we can be.
    Mr. Scott. I agree with you. And we are going to work 
towards that goal. Thank you.
    Chairman Huizenga. The gentleman's time has expired.
    With that, the Chair recognizes the Vice Chair of the 
subcommittee, Mr. Hultgren from Illinois, for 5 minutes.
    Mr. Hultgren. Mr. Cook, it's good to see you. Thank you 
very much for being here. I appreciate your work at FINRA.
    I would like to focus my questions and our discussion a 
little bit on how FINRA encourages competition, especially for 
small and middle market dealers.
    As you know, I sent a letter to you and Chairman Clayton a 
little bit earlier this year raising some concerns with 
amendments to rule 4210. I apologize that the letter was a 
little bit late in the process, so I really do appreciate how 
quickly you and your staff have been able to address the 
concerns that I had.
    I understand FINRA recently hosted some roundtables that 
also included stakeholders that have raised concerns with rule 
4210 amendments. How do you plan to work with broker-dealers as 
they implement these rules?
    Mr. Cook. Thank you for the question, sir. I think it is 
important, as we implement rules like this, that we be actively 
in dialogue with the industry that is subject to them. And as 
you mentioned, we had several roundtables to talk to buy side, 
sell side investors, different size firms. We learned a lot 
about some of the challenges there. I think one of the things 
we learned is that there is probably an opportunity to provide 
some more guidance in this area that would help firms with the 
implementation, and so that is something we are thinking about.
    This particular rule that you are referring to, the margin 
requirement, did come about because of concerns that these long 
dated transactions historically weren't margins, so there is 
sort of market risk and investor protection concerns driving 
this initiative. We also want to make sure we are trying to 
implement in a balanced way.
    Because of the way the margin rules work, they intersect 
significantly with the SEC's capital rule, and so--and customer 
protection rule, so we are talking to them as well about the 
whole overall framework and whether there is opportunities for 
us to give more guidance. It would be helpful.
    Mr. Hultgren. Great. Yes, I think that would be, and I 
appreciate that.
    Since the creation of FINRA back in 2007, I know there has 
been a 23 percent reduction in the amount of FINRA-registered 
broker-dealer members. Similarly, from 2009 through 2016, the 
ranks of broker-dealers registered with MSRB fell by 26 
percent. This trend means less competition amongst dealers. 
Fewer daily liquidity providers and fewer options for U.S. 
investors and issuers. By many accounts, increased regulatory 
burdens have played a significant role in broker-dealer 
industry consolidation.
    How does FINRA assess its rule proposals and current rule 
book to ensure that its rules are not creating an unnecessary 
burden on broker-dealer competition, especially the smaller 
broker-dealers? And I wondered, can this process be improved, 
given the rate of industry consolidation?
    Mr. Cook. Thank you, sir. Yes. I think on the numbers you 
mentioned, there has been a decline in the number of brokers. 
The number of registered reps has more or less stayed the same, 
which implies maybe there is consolidation going on. One thing 
I think it is also important to note that as compared to some 
other industries, we actually have new brokers--new firms 
coming in every year. Last year, we had 120 new broker-dealers 
come in. We just had more leaving, and that is where the 
concern arises. It has been going--that story has been the case 
for the last 15 years.
    So I think we need to be cognizant of the impact of our 
rules on small firms. We need to think about how we can tailor 
the rule book to the small firm that was--the capital 
acquisition broker rule book is a good example of how to 
address that. Engaging careful economic analysis where we take 
into account the impact of the small firm. In dialogue with our 
small firm advisory board, which looks at every rule that goes 
up to our board. And then also thinking about what tools we can 
provide to small firms to help them comply. I think this is a 
differentiating feature of an SRO, is that we can and do spend 
significant resources to try to deliver to our firms tools to 
help them comply with the rules, whether it is report cards, 
checklists, online resources. So I think those are all things 
we need to pursue.
    Mr. Hultgren. And I think you hinted at this, but the FINRA 
board of directors, specifically the small firm governors, do 
have an active role in that process, you are hearing from them, 
is that correct? Do you feel like their voice is heard enough 
to address maybe some of the concerns here?
    Mr. Cook. We have elected small firm governors on our board 
which has to approve all of our rules. And then we also have a 
special advisory board of small firms--I actually just met with 
them this morning--who look at our rule proposals. I think we 
have to ask ourselves, what more can we do to make sure we are 
hearing that perspective?
    Mr. Hultgren. In the few seconds I have left, as part of 
FINRA's recent 360 review, several comment letters urged FINRA 
to adopt a more rigorous regulatory cost-benefit analysis 
process, including a required retrospective review of FINRA 
rules. What processes could FINRA consider adopting to look 
back at rules that have been adopted to ensure that the 
economic assumptions that supported the rulemaking were 
reasonable and accurate?
    Mr. Cook. We believe retrospective reviews are essential. 
We have actually been on the leading edge of this in terms of 
SROs both in terms of adopting a stated framework for doing an 
economic analysis and a stated framework for how we will go 
back and look at our rules from time to time. We actually have 
several rules that are in the process already or have gone--
various stages are going through retrospective rule review. Can 
we do more? I think that is an area I am very interested in, in 
beefing up our ability to support that through our chief 
economist.
    Mr. Hultgren. Great. Thanks, Mr. Cook.
    I yield back.
    Chairman Huizenga. The gentleman's time has expired.
    The Chair recognizes the gentleman from Connecticut, Mr. 
Himes, for 5 minutes.
    Mr. Himes. Mr. Chairman, thank you.
    And welcome, Mr. Cook. It is good to see you again. And I 
say again, because in a year that will not be named, we as 
sophomores started the social studies program together. And 
when I have more than 5 minutes, we can have a conversation 
reflecting on our careers as to whether we learned any 
marketable skills in that program.
    Mr. Cook. That will be an interesting conversation.
    Mr. Himes. But I want to talk with you about something that 
we have corresponded about, which is the remarkable consistency 
of IPO gross spread pricing. And just to remind you--I know you 
have looked at my letter of July 15, 2016--I was very active in 
promoting and writing and passing the JOBS Act. And the whole 
premise of the JOBS Act was that Sarbanes-Oxley regulation 
imposed somewhere between $1 million and $3 million in 
compliance costs for young companies at a time when that was 
very, very real money for them. And I sort of noted, having 
done a fair number of IPOs myself, that a 7 percent gross 
spread on an average IPO of $100 million in size is $7 million. 
So, that is significant money as well. And, the remarkable 
consistency of 7 percent gross spreads in IPO at least raises 
questions of whether there is truly a competitive market and 
whether perhaps our young companies are being asked to bear the 
cost of a product that is not being priced competitively.
    You were kind enough to respond to me in a letter of 
January 19, 2017, in which you said that you were interested. 
And you also said that, in light of the recent enactment of the 
JOBS Act and the SEC rules thereunder, you want to take a look 
at this subsequent to the JOBS Act. It wasn't clear to me 
exactly how the provisions of the JOBS Act would have an effect 
on IPO gross spreads. And in fact, maybe I am wrong, and if it 
was a competitive market, maybe it would have.
    There have been about 1,000 IPOs since the JOBS Act passed. 
And I can fill in the blank for you here: The median IPO gross 
spread for IPOs between $50 million and $200 million in size, 
pre-JOBS Act, was 7 percent. There have been 1,000 IPOs since 
then. The median IPO gross spread since the passage of the JOBS 
Act is 7 percent. The mean has changed from pre-JOBS Act of 
6.94 percent to 6.96 percent. So we are seeing that remarkable 
consistency yet even after the JOBS Act.
    My question for you--and I highlight that because I really 
think we need to sort of dig in to what is happening here. And 
I have been careful not to say that it is clear one way or 
another, but this is real money to our young companies. In the 
analysis that you provided to me, you basically said there are 
two competing explanations for this: one is that there is 
collusive pricing behavior; and the other is that flat pricing 
of gross spreads can represent an efficient contractual 
solution for issuers and underwriters by reducing the 
dimensionality of the contract, and that it simplifies 
negotiations between the issuer and the underwriter. I candidly 
don't understand any of that.
    So can you help me with how that would be consistent with 
the competitive market explanatory of consistent 7 percent 
gross spreads?
    Mr. Cook. Thank you, sir, for your continued interest in 
this. And we are interested in working with you on this. We 
appreciate the opportunity to have our chief economist talk 
with your staff about it.
    That phrase, ``efficient contracting,'' isn't one we made 
up, obviously. It is derived from the literature, the academic 
literature. And I think on your point about whether--you have 
direct experience in the capital raising process. So I am not 
going to pretend to be able to--address your firsthand 
knowledge of it, but I think in terms of your question about 
how--what has been the impact of the JOBS Act and whether the 
data shows an impact or not, I would defer to our economist to 
help advise on whether there has been enough time for the JOBS 
Act to have a meaningful effect. And in respect to that, I 
think our letter said we agree with the SEC, because that was 
their position, I believe, in their response to you that the 
JOBS Act may have been enough. That all said, sir, we are happy 
to engage with you on this.
    One of the things we feel we are missing in terms of our 
ability to follow up on this is having access to all the 
relevant parties, the issuers in particular, and there are some 
very sophisticated issuers, sponsors who routinely engage from 
private equity transactions in IPOs to talk to some of them 
about what is going on. Do they feel they have the opportunity 
to negotiate? So we would be happy to work with you.
    Mr. Himes. And I totally appreciate that, I really do. I 
think that is what should happen. And, again, just intuitively 
this notion that the JOBS Act was about simplifying the IPO 
process. And I think it did so dramatically in very positive 
ways. Again, I am not an economics Ph.D., but simplification 
should theoretically lead to lower pricing, and it manifestly 
has not. So, again, this is just another thing that raises 
important questions.
    I am out of time, and I appreciate your response. But I 
agree completely, this is the moment to bring in players and to 
look at the data and find out what is happening. Again, I have 
been very careful not to level accusations here, simply to 
raise the possibility and to ask that this be looked at. And I 
will put this into a letter, but I would be grateful for some 
follow-up on this point.
    Mr. Cook. I appreciate that. Just to point out again that 
to do that, we think we need to partner with the SEC, because 
they are the ones who have more access to the other relevant 
parties.
    Mr. Himes. I will talk to them too. Thank you.
    And thank you, Mr. Chairman.
    Chairman Huizenga. The gentleman's time has expired.
    The gentleman from Minnesota, Mr. Emmer, is recognized for 
5 minutes.
    Mr. Emmer. Thank you, Mr. Chairman. And thank you, Mr. 
Cook, for being here.
    I want to talk a little bit about the FINRA360 program that 
you are doing. You talked when you started today about 
generally doing these listening sessions and trying to get 
feedback. And you started this program that is going to be 
ongoing, how to get feedback from your members. The comment 
period closed a while back. Can you give us an idea of how many 
comments you got when you started asking for their feedback 
about how you are doing, how FINRA is doing, what they expect?
    Mr. Cook. Thank you, sir. We got comments through a special 
notice we issued on our engagement programs and how we engage 
with our members and with the public, our committee structure, 
our rulemaking process. So we got a number of written comments 
on that. I don't remember the exact number. I am happy to get 
that to you. But in addition, through the listening tour and 
other informal interactions we have had with our members, we 
have also gotten a lot of feedback. And so we are really 
treating it, whether it is in the comment file or not--and the 
comment file is not closed, if anyone--we are still willing to 
take comment from folks about how we can improve our operation.
    Mr. Emmer. Sure. Has it been, would you say, on a balance 
sheet of overwhelmingly positive? Has it been overwhelmingly 
negative? What have you been getting?
    Mr. Cook. We have gotten positive, but we have also gotten 
negative. And I would say more in the negative category. But a 
lot of the comments that we have gotten in the negative 
category have been very helpful to us in terms of identifying 
aspects of our programs that we could improve. So many of it is 
very much in the weeds in terms of how we examine firms, the 
processes we use, the way we request information from them, the 
technology we have to interface with them.
    Mr. Emmer. But isn't this what the real issue is, and what 
I want to get to in the short time we have is, how are you 
going to address it? Mr. Hill earlier was asking questions 
about whether you feel you are more of a government type entity 
or you are more of a private entity. And he was kind of 
touching on the edges when it came to disclosures, 
transparency, what do you think you are responsible for. I 
think he mentioned the Freedom of Information Act, and you 
responded that no SRO is subject to the Freedom of Information 
Act and those requirements. But isn't that the big complaint?
    The biggest complaint and my concern is there is no 
transparency. The membership doesn't know how you are making 
these decisions. You are supposed to be accountable to the SEC, 
and you said that there have been some enhancements. But how 
much accountability is there when there is no publicity of the 
actual board meetings, what is being discussed, where board 
members are? How are you going to address those problems, or do 
you not see them as valid concerns?
    Mr. Cook. Transparency and disclosure have certainly been 
among the comments that we have gotten in the comment file. So 
we will--we are going through a process where we are organizing 
these comments, trying to understand how we can best respond to 
them, and we will be going to our board to talk about proposed 
responses to these.
    There are a number of areas where people have asked for 
more disclosure, and we will focus on that. I have to say, most 
of the member firms I talked to, this is not their number one 
issue. They are more focused on how our exam program works, is 
it really risk-based. How are we focusing--
    Mr. Emmer. Isn't that because--some of the perception is 
this has moved to more of a prosecutorial type approach as 
opposed to a regulatory operation. It is trying to help firms 
stay in business. Again, the time is going to run out, but you 
have $1.6 billion that you are holding in reserve at the end of 
last year. Why?
    Mr. Cook. Collaboration with the industry is very 
important. The portfolio we have is something that came out of 
the sale of NASDAQ. So when NASD sold NASDAQ, there were 
proceeds that came. And the question came up, well, what do we 
do with these? There were tax issues with giving it out to the 
members. So the decision was made, let's use this to help fund 
the regulatory programs going forward. And for example, we 
haven't raised fees in 5 years.
    Mr. Emmer. No, but if I can interrupt, and I am sorry, but 
you have what have been--the accusation is that your people are 
paid well above what folks in similar positions would be paid. 
I think I saw a number, that 7 of your top executives get $1 
million a year, and several of them are at $900,000. One with 
incentives and everything else gets $2.7 million, which doesn't 
seem to be in line with some of the other SROs that are doing 
similar functions.
    How do we get more transparency about how you are making 
these decisions, where this money is going, what it is being 
used for, and why the fees, the fines, et cetera? How do we get 
more transparency? Because it seems that the SRO model, as you 
referred to it in the beginning, looked like something 
different and now it has grown into something that looks, to 
me, a lot more like a government agency that uses its heavy 
hand to extract fines, and with the interest, this balance you 
are talking about of trying to protect the marketplace, but it 
doesn't--it is not giving me the confidence because there isn't 
this transparency.
    And I see my time has run out, but maybe we can continue 
this conversation so I can understand better what you are 
trying to do.
    Mr. Cook. I would be happy to continue the conversation. I 
think you raised important points. This is really why we have 
FINRA360, to take a look at some of these questions. We have 
enhanced the website disclosure around our board, for example, 
just yesterday. There are steps we can take to help advance 
transparency, and we would be happy to talk with you about what 
you are hearing--
    Mr. Hultgren [presiding]. The gentleman's time has expired.
    Mr. Emmer. Thank you.
    Mr. Hultgren. The gentleman from New York, Mr. Meeks, is 
recognized for 5 minutes.
    Mr. Meeks. Thank you, Mr. Chairman.
    And, Mr. Cook, thank you for being here. I think this is 
your first time being before our august committee, so welcome 
aboard. Let me ask you just a couple of questions. This might 
have initially predated you, but I am sure you know about, in 
2015, the Dispute Resolution Task Force recommended that FINRA 
gather data on race and gender of its current mediators in 
order to determine whether FINRA's diversity efforts were 
making a meaningful change. And I think it was also for your 
arbitrators. And I think that--I know that FINRA has complied 
and made public data on the composition of the newly added 
arbitrators, but we did not and I have not seen anything in 
regards to the mediators as it was recommended by the task 
force.
    So I was wondering whether you have gathered similar data 
on race and gender of your current mediators pursuant to the 
recommendations of the dispute resolution task force?
    Mr. Cook. Thank you, sir. As you noted, the recommendation, 
which is one we support, to study and then promote the 
diversity of our rosters is--I don't know the answer to your 
question about where we are in the mediator versus the 
arbitrator. I can find that out and follow up with you.
    In adopting the recommendations, we have engaged a 
consultant to help us understand the diversity of our 
arbitrator roster. In addition, in order to help promote that 
diversity, we have engaged an adviser to help figure out how to 
do better recruitment. We have enhanced our own recruitment 
tools. We have done more marketing through social media and 
direct market advertising. And we did report that, year over 
year, we did see a meaningful increase in the number of 
African-American arbitrators and women arbitrators. We have a 
lot of work left still to do in that regard. So we are not 
claiming victory by any means, but it is something we are 
committed to. And whether the difference between arbitrator and 
mediator in that answer, I don't know the facts, and I will 
have to get back to you.
    Mr. Meeks. Great, because I would love to see that data. As 
I said, I appreciated your intent. And from everyone that I 
have spoken with, you are moving in the right direction. And I 
always want to make sure I help give you the little push to do 
that.
    In fact, I think that it would be great if, say, you or 
someone else from your office would commit to working with me, 
I look forward to working with you and other members of the 
Congressional Black Caucus so that we can help you do a better 
job of recruitment of mediators and arbitrators from various 
communities, connecting you with, whether it is fraternities or 
sororities or other professional groups we have, that would be 
a base which you could work from to get qualified individuals 
who would be very interested, and certain graduates from 
Historically Black Colleges and Universities (HBCUs).
    So maybe we should continue to have dialogue and 
conversation in that regard, and we could figure out how we can 
work closer together to make that happen. Because I know of a 
lot of individuals who are looking for that opportunity.
    Mr. Cook. We would welcome that opportunity. One of the--
diversity inclusion, even aside from the arbitration program, 
is I think we have a significant commitment to it at FINRA. And 
in part, we want to help promote it in the industry as well. We 
hosted an annual diversity conference to bring industry 
participants in to talk about best practices and how we can 
better ensure that the industry represents the diversity of the 
investors that we are serving. And so we would welcome the 
opportunity to work with you further on that.
    Mr. Meeks. That is fantastic. In fact, I can think of--and 
maybe we can invite you to some functions that we are having 
where there would be the appropriate crowd, because we do that 
a number of times. And whether you or someone that you 
designate could come and talk about what FINRA--what you are 
doing and what the opportunities are, because I think that 
would make a great--
    Mr. Cook. We would welcome that opportunity, sir. Thank 
you.
    Mr. Meeks. Thank you. We appreciate you.
    And I yield back the balance of my time.
    Mr. Hultgren. The gentleman from New York yields back.
    The gentleman from Ohio, Mr. Davidson, is recognized for 5 
minutes.
    Mr. Davidson. Thank you, Mr. Chairman.
    And thank you, Mr. Cook, for coming here and talking with 
us today. I want to talk to you a little bit about the 
consolidated audit trail that is supposed to launch in November 
2018. In your opinion, is that on track?
    Mr. Cook. Actually, initial reporting is starting in 
November of this year. And, again, FINRA is not the processor 
for this audit trail. A private company was selected to do 
that. They are doing it by contract with a consortium of 
exchanges. I think it's still a work in progress. And whether 
the targets will be met or not, I don't know.
    Mr. Davidson. Once that is in place, will it replace OATS 
and electronic Blue Sheets?
    Mr. Cooks. It has the potential to--certainly, the goal is 
once we have a consolidated audit trail, the existing audit 
trails would go away. Blue Sheets, there is going more of a 
transition period because the CAD information, we will have it 
as of the date of the cap, but sometimes we need to go and get 
information from a year ago or 2 years ago. So over time, 
though, we will be--this will help us replace the Blue Sheet 
and reduce the burdens.
    Mr. Davidson. There will be some overlap. What is your path 
to the overlap going away?
    Mr. Cook. In terms of the existing audit trail systems that 
we run versus the consolidated audit trail, we have a rule 
filing pending with the SEC to lay out a plan for how this 
would happen. And basically, the goal is to make sure that we 
have the new information in the consolidated audit trail with 
sufficient data integrity and reliability so that we could 
phase out the old audit trails.
    Mr. Davidson. So have you put together a migration path 
yet?
    Mr. Cook. There would be a set of criteria set up to 
determine whether there is sufficient quality of reporting and 
data integrity of the reporting to rely on the new system so 
that we could then unwind the old system. There would be a 
threshold, there would need to be a certain threshold met in 
terms of reliability of the new system.
    Mr. Davidson. And when you say thresholds met, of the 
consolidated audit trail?
    Mr. Cook. Yes, yes.
    Mr. Davidson. So you have your own independent way that you 
are planning to assess whether the consolidated audit trail is 
working?
    Mr. Cook. It has to do with whether the reporting is of 
sufficient accuracy. Our experience, because we operate the 
audit trail now, is that when you roll out a new system, there 
is a high--there is a lot of work that has to go into it. The 
compliance goes down in terms of--compliance rates go down. And 
so we need to make sure that the data reporting coming in is of 
sufficient quality that we can then let the old system go.
    Mr. Davidson. Okay. Well, I am glad to hear that you 
anticipate a path where there won't be duplication of effort.
    Mr. Cook. No, absolutely the goal is to roll off the old 
platform.
    Mr. Davidson. And the last question I have is related to 
cybersecurity for broker-dealers. What is your assessment of 
the present situation?
    Mr. Cook. I'm sorry?
    Mr. Davidson. Cybersecurity, how do you feel firms are 
doing? FINRA oversees a fair number of them.
    Mr. Cook. Yes. This is an area that we all need to be 
focused on, and I think we have been focused on this in terms 
of our oversight and examination program. We have approached it 
in a number of ways. We have issued a report to firms, made it 
available to firms about best practices in this area. We 
provided checklists so we can help firms understand how they 
can develop robust systems. And then in our examination 
programs, we are working to help them identify potential flaws 
or gaps. We do see opportunities for improvement in certain 
areas, and we are working--we would then identify those to the 
brokers involved. We are seeing a lot of brokers spend 
significant time, broker-dealers spend time on this and 
investment in it, but this is one of those areas where the work 
is never done.
    Mr. Davidson. Okay. So there is some overlap on all the 
things that you talked about. And really to kind of go back, 
you would like one standard for the fiduciary rule, for 
example. But yet as a regulatory body, you see the benefit of 
not having one standard. Why do we need all this duplication of 
effort in the regulatory environment?
    Mr. Cook. I think the cyber environment is an area where 
there is really a need for more coordination among regulators. 
There is not one established standard. And so one of the things 
we are trying to do in our oversight of broker-dealers is not 
to tell them you have to do it this way or that way to offer 
them best practices. Obviously, if you see something really 
egregious, we need to follow up on it, but not to dictate a 
path, because we recognize many of the firms we regulate are 
also regulated by other agencies. And so there would be an 
opportunity here, I think, for whether it is through this 
committee or through other intergovernmental agencies, to 
develop a more standardized approach to what is really a 
crucial area.
    Mr. Davidson. I appreciate your respect for the free market 
in that sense, and I hope you will embrace it for fiduciary 
rule.
    Thank you. I yield back.
    Mr. Hultgren. The gentleman from Ohio yields back.
    The gentleman from Indiana, Mr. Hollingsworth, is 
recognized for 5 minutes.
    Mr. Hollingsworth. Good afternoon. Thank you, Mr. Chairman. 
And thank you, Mr. Cook, for being here. I really appreciate 
it. And it has been enlightening thus far.
    I wanted to ask about your innovation outreach initiative 
and talk a little bit about who you talk to about different 
operations inside FinTech and as well kind of what the feedback 
has been about FinTech so far and what the progression is with 
regard to that initiative.
    Mr. Cook. Thank you. Well, it is very much in the early 
stages. We have a committee internally that would help us 
understand FinTech and be a central source of information 
intelligence, but we figured we needed to--we thought we needed 
to ramp up our activity in this area. 
    Mr. Hollingsworth. What prompted that, out of curiosity? 
Was that something that you heard in feedback?
    Mr. Cook. Yes, on a listening tour, and also just 
recognizing that this is a change that is happening in the 
industry and we really need to be a leader in it. We are a 
leader in technology in our own operations. I think we have 
done an enormous amount by way of automating through our cross-
market oversight, our surveillance programs. Investing in 
technology has been big for us. So we are very interested in 
RegTech, both as a regulator, but also trying to understand 
how--what is happening in the FinTech space, because this is 
also an area for promoting small business and firms. So we are 
setting up a new advisory committee to help us understand what 
is going on there. We hosted a conference on blockchain in New 
York a few weeks ago, together with other regulators. And we 
are going to be conducting a series of roundtables on FinTech, 
and then we will see.
    Our goal is to try to understand what is happening, how we 
can participate, not how we can regulate, per se. We don't want 
to direct the outcomes. We also want to understand, are there 
investor protection concerns? And are there ways in which our 
rules may be getting in the way unnecessarily of new 
development?
    Mr. Hollingsworth. Great. And how do you see that unfolding 
over time?
    Mr. Cook. I think we will need to make an assessment of 
what feedback we get. Are there rules that get identified as, 
hey, this is a problem for us? People say, I want to introduce 
this new innovative technology. Sometimes it is a new firm 
whose old business model is based on innovative technology. 
Sometimes it is existing firms, so using technology to deliver 
traditional services in different ways. And what we want to 
understand is, what is going on? Where are the risks? And are 
there opportunities for us to change the rules?
    Sometimes people talk about creating a sandbox, a 
regulatory sandbox. We thought that was a potential future step 
that we could consider, but first let's see if there are 
actually--help us identify areas where our rules are getting in 
the way of innovation unnecessarily.
    Mr. Hollingsworth. I imagine given how broadly FinTech has 
at least the opportunity to impact the financial sector, you 
are interacting with a lot of other regulators both 
domestically and internationally on this front. Have you found 
them to be as receptive to new technology and the opportunities 
that FinTech might bring as you are?
    Mr. Cook. I think we--all of the regulators that we know 
are interested in this area. They have different ways of 
approaching it, different ways to understand what is happening. 
We do have a dialogue with international regulators as well. We 
are trying to understand best practices. That is partially how 
we developed our program, our innovation outreach program, was 
to look at, what are other people doing and how can we adapt it 
to our own context? But we welcome the opportunity to interact 
with other regulators, including on understanding how they use 
technology and to leverage their own oversight functions.
    Mr. Hollingsworth. Yes. I have never heard the term 
``regtech'' before, but I like it. I appreciate that.
    So with that, I will yield back, Mr. Chairman. Thank you.
    Chairman Huizenga. The gentleman yields back.
    With that, the gentlelady from Missouri, Mrs. Wagner, is 
recognized for 5 minutes.
    Mrs. Wagner. Thank you, Chairman Huizenga. And thank you, 
Mr. Cook, for your testimony this afternoon.
    As I am sure everyone in this room knows, and I am sure 
that Mr. Cook knows, I am not a huge fan of the Department of 
Labor's fiduciary rule. In fact, I am having a hard time 
finding many fans of it. I just came from an event this 
afternoon where industry stakeholders from both the public and 
private sectors discussed research that shows the rule is not 
working. In fact, numerous independent studies of late have 
concluded that brokerage advice services have been dramatically 
affected in addition to, ``significant operational disruptions 
and increased costs for financial institutions,'' which in turn 
means increased cost for retail investors, and then the 
negative effects are just building and building. Further, 
FINRA's mission is to safeguard the investing public against 
fraud and bad practices.
    So a simple question, did the Department of Labor consult 
with you in any substantive way when crafting their current 
rule?
    Mr. Cook. Thank you, Congresswoman. We did have 
conversation with DOL to give technical advice.
    Mrs. Wagner. Technical advice only.
    Mr. Cook. Technical advice to offer our understanding of 
how the brokerage model works, how our rules work, how what 
they are proposing might interact with our rules.
    Mrs. Wagner. I guess I am surprised there wasn't a more 
substantive discussion about your opinions on the issue, and 
being one of the primary regulators, did they or did not 
consult in a substantial measure with you all on this new rule 
letting?
    Mr. Cook. In addition to sort of staff-to-staff technical 
advice that I mentioned, FINRA did write a comment letter to 
the DOL during the rulemaking process. This was before my time, 
so it is not fresh in my mind. But yes, FINRA did offer its 
comments on the proposed DOL rule. And DOL did take into 
account a number of elements of our comments.
    Mrs. Wagner. Do you believe the SEC is best suited to 
enforce and regulate a best interest standard for broker-
dealers?
    Mr. Cook. I think what is best is to have a uniform 
standard for broker-dealers across the different channels of 
advice, different ways of advice.
    Mrs. Wagner. And we currently do not have that, correct?
    Mr. Cook. We do not have a uniform standard, no.
    Mrs. Wagner. Yes or no, do you support the DOL's delaying 
full implementation of the fiduciary rule for 18 months as they 
continue to study the effects of the rule?
    Mr. Cook. I think the delay or not is a decision for them 
to make. I think what we would like to promote is an 
environment where there could be consultation between the SEC 
and the DOL, and we are happy to participate in that to help 
establish a uniform rule across the different types of 
investment advice.
    Mrs. Wagner. For broker-dealers specifically?
    Mr. Cook. For broker-dealers, but also for investment 
advisers. So regardless of who you are going to for your retail 
advice on your trading in securities, that you are--
    Mrs. Wagner. Depending upon the definition of ``adviser,'' 
they have a fiduciary standard already. We are talking 
specifically about the DOL rule as it affects broker-dealers.
    Mr. Cook, in remarks you gave earlier this year, you talked 
about how you didn't see yourself as the examination or 
enforcement regulator under the Department of Labor rule. But 
you went on to say that if the rule went away and the SEC 
stepped in, you felt like FINRA would have a role in the 
process of crafting that rule. SEC Chair Clayton has requested 
comments in assessing standards of care applicable to 
investment advisers that are broker-dealers. Can you discuss 
what role FINRA has played in this process to date, and what 
role you envision FINRA taking should the SEC move forward with 
its own rule?
    Mr. Cook. Should the SEC move forward, we would appreciate 
the opportunity to interact closely with them and give, again, 
technical advice in the crafting of the framework. And then 
depending on what they came up with, there may be ways in which 
we need to revisit some of our rules to conform to their 
approach. So we look forward to engaging fully with the 
chairman and the commission as they move forward with that 
initiative.
    Mrs. Wagner. Now, one of the roles FINRA plays is examining 
firms regarding compliance. I imagine you hear a lot of 
complaints from broker-dealers. Since June, when DOL's 
fiduciary rule partially took effect, have you heard from 
broker-dealers about the implementation?
    Mr. Cook. We have heard from, especially smaller firms, 
about the implementation.
    Mrs. Wagner. And what are those concerns?
    Mr. Cook. The smaller firms are concerned about the 
compliance burdens. I think there are many different business 
models out there, and it is hard to--what I am sharing with you 
is purely anecdotal, we haven't done a study of--
    Mrs. Wagner. There have been many studies done, but please.
    Mr. Cook. But not from us, so that is all I want to be 
clear about. And so some small firms have expressed concern 
about the compliance burdens. Large firms have also indicated 
that they are able to comply with it in different ways. So I 
think there is a variety of different responses that we hear.
    Mrs. Wagner. Hmm. Interesting testimony.
    I think I have run out of time, Mr. Chairman. I yield back.
    Chairman Huizenga. The gentlelady's time has expired.
    So with that, Mr. Cook, we--
    Mrs. Maloney. Thank you.
    Mr. Huizenga. With that, on queue.
    Mrs. Maloney. Thank you so much. And I apologize to my 
colleagues.
    Chairman Huizenga. We were aware that you had a meeting at 
the White House.
    Mrs. Maloney. I want to report a bipartisan effort between 
New Jersey, New York, Republican, Democrat, and the President 
of the United States to improve the transportation city between 
the two States. It is important. And it was a great meeting, 
but I wasn't here for this important hearing.
    I just--
    Chairman Huizenga. With that, let me officially recognize 
the ranking member here for 5 minutes for her questions.
    Mrs. Maloney. Okay. Thank you so much.
    And I just would like to ask a few questions. I tell you, 
we created this year a Terrorism Financing Subcommittee, 
Chairman Hensarling did. And it is really important, if they 
don't have money, then they can't put off their bombs in our 
great cities and neighborhoods. And so, FINRA's work is really, 
really important.
    Mr. Cook, you noted in your testimony that FINRA has 
recently started to collect information on transactions in 
Treasury securities, which will be made available to the 
regulators. And one of the big debates was whether Treasury 
transactions should be reported publicly as well. Some market 
participants thought that this would harm the market because it 
would allow high-speed traders to see what other investors were 
doing and jump in front of them. But others thought that 
increasing the transparency of the market would enhance market 
quality and bring more investors in.
    So what are your thoughts on this? Should transactions in 
Treasury be reported publicly or just to the regulators? What 
is your sense?
    Mr. Cook. Thank you for that question. The TRACE for 
Treasury's program is really just--it is new, it just started 
in July. And so I think what we have an opportunity to do is to 
look at the data that has come in and understand what we are 
seeing in ways that we couldn't have done before. And then I 
think it is--at this point, there are a couple of questions 
that we need to think about in terms of next steps. One is to 
make sure that all the relevant parties are reporting into the 
system. And a program that we rolled out is just for broker-
dealers, because those are our members. The Federal Reserve 
Board had announced publicly that they were going to talk with 
us about perhaps working on a system so that banks, who can 
also trade in this market, would also be reporting in.
    So I think that before we think about reporting some 
people's trades and not others, we need to think about whether 
there are--we have the full scope of the reporting sufficiently 
covered.
    Mrs. Maloney. Okay. And also, I would like to talk a little 
bit about cybersecurity. And I know that FINRA identified 
cybersecurity as one of the examination priorities for you this 
year. And I think that is very important, because cybersecurity 
is a huge risk and it is growing every day. I know that most 
Members of Congress have been hacked. And cybersecurity is 
especially important for financial institutions that hold their 
customers' money, broker-dealers, because one successful cyber 
attack against a broker-dealer could wipe out millions of 
dollars of wealth.
    So my question is, are you finding that firms have adequate 
programs in place to mitigate cybersecurity risk or is this an 
area that we have to continue to shore up?
    Mr. Cook. Thank you, ma'am. I think this is an area that we 
can never lose focus on because it is so important. And the 
risks are evolving constantly. And so what we have tried to do 
is to provide more resources to firms to help them develop the 
best programs they can. We did a report in 2015 that put forth 
a variety of best practices that firms could follow. We also 
created a checklist for firms to help them think through, 
particularly smaller firms, to help them think through how they 
can protect themselves and their customers data appropriately. 
And then it has been an exam priority for us.
    Yes, we do have findings for certain firms that we then 
review with them and give them ideas about how they can 
correct. One of the things that, for example, we see sometimes 
is that the access by application developers to a live system 
may be not sufficiently controlled. So when we see these sorts 
of deficiencies, we work with the firm to help identify 
potential best practices that they could bring to bear on it. 
But it is an area that I think we continually need to focus on.
    And there is an opportunity, I think, for collectively--and 
this goes well beyond FINRA--to look across the financial 
services agencies to really define what are the standards that 
we need to apply. FINRA should not be making the standards in 
this area, because there are so many other--by itself 
certainly, because there are so many other relevant regulators.
    Mrs. Maloney. And also, in your priorities for this year, 
you included a pilot examination program designed to determine 
the value of conducting target examinations of smaller firms 
which have not previously been subject to review due to their 
small, low-trading volumes. And could you help us by providing 
an update on the progress of this pilot program? Have you found 
that firms that haven't previously been examined present any 
special risk to customers?
    Mr. Cook. The pilot which is still underway, so we are 
still drawing our conclusions from it, was focused on firms. 
Their trading activity is being collected and it is being 
surveilled as a whole. We also do exams on these firms. So I 
don't want there to be an impression that this is the first 
time these firm would have had an examination. This is really 
focused on a particular type of examination that we 
historically had not done for them because their trading volume 
is so low. And the question was, do we have the thresholds 
right? We are trying to do a risk-based exam program, and so we 
are not--I think it is fair to say we are not finding 
significant issues here, but the pilot is still under way and 
we will need to draw conclusions once--
    Mrs. Maloney. Thank you. My time has expired. Thank you.
    Chairman Huizenga. The gentlelady's time has expired.
    Mr. Cook, I want to say thank you for your time today. I 
want to congratulate you again on your efforts with FINRA360 
and that examination that is going on. I look forward to 
continuing this conversation with you, not only on an official 
basis, but informally as well, as we encourage you to listen to 
some of the concerns that were expressed here today, as well as 
some of the lines of questioning. We will look forward to 
continuing to work with you. And, again, I appreciate your 
patience on our timing. I know we were a bit thrown off by the 
votes, and I appreciate your patience on that.
    The Chair notes that some Members may have additional 
questions for this witness, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to this witness and to place his responses in the record. Also, 
without objection, Members will have 5 legislative days to 
submit extraneous materials to the Chair for inclusion in the 
record.
    And with that, again, Mr. Cook, thank you.
    Mr. Cook. Thank you, sir.
    Chairman Huizenga. And this hearing is adjourned.
    [Whereupon, at 4:50 p.m., the hearing was adjourned.]

                            A P P E N D I X



                           September 7, 2017

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