Richard G. Ketchum: Puts Finra in pole position to be regulator of advisers

Dec 19, 2010 @ 12:01 am

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To independent investment advisers, Richard G. Ketchum just might be Public Enemy No. 1.

Mr. Ketchum, 60, who took over as chief executive of the Financial Industry Regulatory Authority Inc. in March 2009, has carefully positioned Wall Street's self-regulator as the SRO-in-waiting for the advisory industry.

Advisers and their interest groups, of course, are aghast at the idea of their business being regulated by Finra.

But under Mr. Ketchum, Finra seems to have gained the upper hand.

The Dodd-Frank legislation re-quires the Securities and Exchange Commission to advise Congress on whether a self-regulatory organization for advisers would improve oversight of the industry. In a report due next month, the SEC is expected to recommend an SRO.

Finra probably won't be named in the report, observers say, but it's the only clear candidate that could take on a self-regulatory role, a point even Finra opponents concede.

In a comment letter last month, Mr. Ketchum said point-blank that the SEC will not have the resources to do an adequate job of examining advisory firms, and he laid out how Finra would, if chosen as an adviser SRO, set up a separate affiliate to handle the task. The affiliate would have its own board of governors and possibly some rulemaking authority.

Meanwhile, Mr. Ketchum has a lot on his plate.

Finra is still working through a series of rule consolidations, combining legacy rules from NASD and NYSE Regulation. Some of the newly consolidated regulations will have a significant impact on legacy NASD firms because the New York Stock Exchange's rules are often more intrusive than many of their NASD counterparts.

On the wish list of broker-dealer firms are better-focused exams that eliminate what firms see as meaningless paperwork, and a change in what they see as a “gotcha” attitude on the part of Finra examiners. Firms want more attention paid to high-risk firms and practices, with exemptions given to small broker-dealers when appropriate.

Mandatory industry arbitration, long detested by plaintiff's lawyers and consumer groups, is another disputed issue before Finra.

Dodd-Frank gave the SEC specific authority to ban pre-dispute arbitration agreements. But Finra has taken some of the heat off its arbitration program by proposing a rule that would allow investor claimants the option of using arbitration panels made up entirely of panelists with no industry connections.

That proposal has not been wholeheartedly supported in the securities industry, which still prefers the use of an industry arbitrator on three-person panels.

Meanwhile, the May flash crash has made market data issues a priority for both Finra and the SEC. After the crash, regulators admitted they had no consolidated audit trail for the fractionalized equity market. Mr. Ketchum, an acknowledged expert on market structure, has been delving into details of improving surveillance. Advisers will be watching for reforms, since the crash hit exchange-traded funds particularly hard.

“Rick has really shown tremendous willingness to listen and is acutely aware of the issues that are out there,” said Ken Norensberg, managing director of Luxor Financial Group Inc. and one of three small-firm Finra board members who successfully challenged candidates nominated by a Finra committee in the board election last August.

— Dan Jamieson


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