FINRA Explains Rule Making Process - The Industry Spread

Michael Volpe

After spending a decade in finance, Michael Volpe has been a freelance investigative journalist since 2009. His work has been published locally in the Chicago Reader, Chicago Crusader, Chicago Heights Patch, and New City. Nationally, Volpe's work has appeared in a wide variety of publications including the Washington Examiner, the Daily Caller, Crime Magazine, the Southern Christian Leadership Conference Newsletter, and Counter Punch. Volpe has been recognized by whistleblowers as leading the charge in getting their stories out. His first book Prosecutors Gone Wild was published in October 2012, his second book The Definitive Dossier of PTSD in Whistleblowers was published in February 2013 and his third book Bullied to Death was published in August 2015.

FINRA

FINRA Explains Rule Making Process

September 3, 2018
Jonathan Sokobin, FINRA’s Chief Economist
Jonathan Sokobin, FINRA’s Chief Economist

A lawyer and doctor got together, and it was not the subject of a bad joke.

Instead, they were the latest guest of FINRA’s podcast, Unscripted, as Phil Shaikun from FINRA’s Office of General Counsel and Jonathan Sokobin, FINRA’s Chief Economist were on the show.

Shaikin and Sokobin talked about how a FINRA rule goes from idea to a finalized rule.

Skaikin noted that proposed rules start staff will try to develop the proposal with stakeholders, industry representatives and one of FINRA’s fifteen standing committees.

“We’ll bounce our proposals off these committees. We’ll refine our proposal and the next step is to take it to the board and approve it for comment.” Shaikin noted.

Then, the rule is put out for public comment in a regulatory notice; Shaikin said the comment period is normally for sixty days.

“The staff will read and analyze all the comments and make changes to the proposal that we see appropriate and consistent with regulatory objective.” Shaikin said.

The staff makes appropriate changes based on the public comment and then the proposed rule goes to the Securities and Exchange Commission (SEC).

“The SEC essentially has to approve all our rule proposals,” Shaikin said.

Shaikin noted that during this process the SEC will put the proposed rule in the federal register, which creates another round of public comment.

“Again, FINRA staff will look at those comments, make any amendments that we think is (sic) appropriate.”

Once a rule is finalized, FINRA normally puts out a note in another regulatory notice “that will also typically include the implementation date and increasingly a guidance in the form of FAQs.”

Sokobian said that public feedback is critical to good rule making: “Often, when we’re developing rules we come from the perspective of what we know, what we hear; we go out, we talk to people. We go through this process that Phil’s talked about. Often there are pieces that we may not know all the information we need to know. We go out; we ask questions; we seek feedback.”

In 2014, FINRA began a process to retroactively review their implemented rules.

Sokobian noted that his and Skaikin’s office have worked in partnership to create a proper review process.

“To have an effective review, you have to be willing at lots of different things. You can’t look at the economics without thinking about what the law says, what the law is trying to do.” Sokobian said. “You can’t expect a rule that was written thirty-five years ago to be well calibrated for the world today.”

FINRA regulates trading on the NYSE and NASDAQ; it was created when the rulemaking arm of both exchanges merged on July 26, 2007.

SECIt is called a Self-Regulatory Organization or SRO.

Another example of SRO’s in America are the American Bar Association and the American Medical Association, both of which license lawyers and doctors.

While the ABA and AMA do not have an overseer, as Shaikin noted, the SEC has veto power over FINRA rules.

The National Futures Association is another SRO, which registers futures dealers, and it too is required to submit all their proposed rules to both the SEC and CFTC, according to its website.

It has fourteen committees which “offer guidance on its rulemaking and other initiatives.” Also according to their site.

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