January 31, 2023

Today’s conversation is with the innovation leaders of FINRA, Haimera Workie and Alex Khachaturian, and I want to start by emphasizing that they are inviting public comments on the initiative we’re discussing in this show — and that the comments are due by February 21! The topic has tremendous implications for all types of financial regulation so please, everyone, send in comments.

To tee up the topic, I’ll share a quick story. I remember an interesting day in 2018. I was sitting at a desk in a hotel room, in some city I can’t recall, and I was on a conference call with the innovation team of FINRA, the U.S. Financial Industry Regulatory Authority. They were explaining a new project to create a regulatory “taxonomy,” laying the foundation for a machine-readable rulebook. I recall laughing, because they said that this probably sounded like a very cool tech initiative, but that the reality of their starter process was the exact opposite — just two lawyers sitting in a windowless conference room with a laptop, reading a section of regulatory guidance looking for key words to enter into an Excel spreadsheet. The plan was to identify and tag specific terms that could be searched for. I remember saying, that day, that they should remember to describe this inauspicious start when, someday, they unveiled an exciting new tool that will help transform the architecture of financial regulation and compliance.

That unveiling is now happening, and Haime and Alex are here to explain what they’ve done, why they’ve done it, and how. Most financial regulatory bodies today have innovation programs, but only a handful are making real headway in leveraging digital technology to overhaul how they function, themselves. FINRA — a semi-independent “self-regulatory organization” focused on the broker-dealer sector — is one of these leaders. 

The possibility of machine-readable, and even machine-executable regulation, has been exciting visionary regulators since the digital age reached the shores of the regulatory world. In 2017, I hosted an international regtech roundtable in my role as a senior fellow at Harvard University, and we theorized there about this idea. I was astonished when, just a few months later, one of the attendees tested it. Nick Cook (then innovation head of the UK Financial Conduct Authority and now our Chief Innovation Officer at AIR) convened an ambitious two-week TechSprint to test the idea that some regulations could conceivably be issued in the form of computer code and could become, in effect, self-implementing. The test worked, culminating in an unforgettable moment in which all the people in the room — regulators, industry and academics alike — leapt to their feet and cheered together. In the four years since then, regulators have continued to work on this possibility. You’ll enjoy hearing Haime and Alex explain what they’re doing, including Alex’s account about the reaction of an industry compliance officer, on what the FINRA project could mean to compliance work. I’ll also link in the show notes to other episodes we’ve done with agencies at the cutting edge, driving to make their own work more effective, including my December podcasts with the FCA’s CEO, Nikhil Rathi and the head of the Monetary Authority of Singapore, Ravi Menon. I’ll also link to the show we did with Andrew McCormack about the G-20’s TechSprint on machine-readable and machine-executable regulation, in which I was a judge. Progress in the regulatory space takes time, but it is coming.

Again, FINRA continues to be one of the world’s leading agencies in this journey. I have the pleasure of serving on its innovation advisory committee, which has turned out to be one of the most fascinating learning and discussion forums in all my innovation work. In today’s show, Alex  and Haime (I’ll also link to our previous episode with him), fill us in on how their Office of Financial Innovation is set up, key lessons it has learned, and their advice to other agencies. 

It’s also notable that FINRA’s initiative coincides with the passage, in December, of the Financial Data Transparency Act. It requires the SEC to create standards that will be followed by a number of U.S. agencies to make information more easily available to the public in a standardized, machine-readable manner. Watch for activity on that front from the SEC.

Let me emphasize again that the comment period on FINRA’s Machine-Readable Rulebook Initiative ends on February 21. They need input on how helpful these new tools can be and how best to design and implement them, including through open source methods that can be used by the investment industry, regtech firms, and others. I strongly recommend reviewing the issuance and offering comments, even if your organization is not a broker-dealer. As I said in my conversation with Haime and Alex, this is the future of regulation. Let’s work on shaping it together!

More on Haime and Alex

Haimera Workie, Vice President and Head of Financial innovation, oversees FINRA’s Office of Financial Innovation, which focuses on analyzing financial technology (FinTech) innovations and emerging risks and trends related to the securities market. As part of these responsibilities, Mr. Workie works to foster an ongoing dialogue with market participants in order to build a better understanding of FinTech innovations and their impact on the securities markets.  

Alex Khachaturian serves as a Director in FINRA’s Office of Financial Innovation (OFI) in Washington, DC.  Alex supports OFI’s mission in the identification and analysis of emerging technologies, laws and regulations, business models, and industry practices (both domestic and international) to inform FINRA’s risk management and strategy goals. His primary area of focus, in recent years, has been at the intersection of technology, law, and regulatory compliance.  Alex’s professional background includes several years of federal government service, law firm practice, and operations within global financial institutions.

More for our Listeners

The holidays and my 2022 year-end travels have left us with a podcast backlog, and we’re going to try to catch back up by giving you a flurry of shows this month, so watch for them!

Building on my recent conversation with NCUA Chairman Harper, we have a fascinating discussion coming up with another NCUA board member, Kyle Hauptman. Watch for our show with Tara Rice from the Bank for International Settlements. We’ll also be posting a show that is one of my favorites we’ve ever recorded, with two visionary women – Delicia Hand and Cleve Mesidor. And watch for a special episode where I’ll be sharing my thoughts on what’s ahead for us all this year. If my creativity doesn’t fail me, it will be loosely inspired by the wildly inventive film, Everything, Everywhere, All at Once.

Also, we’re coming up on both AIR’s fourth anniversary and Barefoot Innovation’s 200th episode, so we’re going to have some special shows to mark those very special occasions!

The AIR spring speaking lineup is taking shape, but several events are in flux, so more to come, next time, on where David, Nick and I will be – hoping to see many listeners.

AIR is growing.  We will shortly announce the addition of a key new executive who we are all very excited about, and we are hiring for several key positions. Please visit our careers page to learn more and apply!

Don’t forget to follow AIR on LinkedIn and Twitter. Be sure to leave us a five-star rating on your favorite podcast platform. And please follow me personally on Twitter @JoAnnBarefoot.

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