A top priority for Finra is to remove rogue brokers from the financial industry — and a key element in doing so is a proposed automatic data collection system that has caused controversy among member firms — according to the head of the self regulatory organization.
In an April 11 interview with InvestmentNews, Richard G. Ketchum, chairman and chief executive of the Financial Industry Regulatory Authority Inc., said that Finra is “laser-focused on the issue of high-risk brokers.”
He added that the Comprehensive Automated Risk Data System is a “critical step” in enhancing the broker-dealer regulator's ability to monitor suspicious trading activity and target brokers who may be hurting investors.
The financial industry and others have criticized the size and scope of the CARDS proposal in dozens of comment letters. They also have questioned whether the system would expose sensitive investor information, even though Finra has said it will not collect personally identifiable information in the process.
In the interview, Mr. Ketchum also addressed other rules the regulator is pursuing.
“My goal is to continue to make Finra a steadily better and better regulator where we have responsibility — which is broker-dealers and market integrity through oversight of the markets,” he said.
IN: Can you provide an update on what you're doing to address brokers who land at new firms after being disciplined or fired?
Mr. Ketchum: Basically, our approach is a three-legged stool. With respect to those brokers where we believe they are involved in fraudulent activity, whether it be Ponzi schemes or egregious sales of specific unsuitable securities — that's being handled by Cam Funkhouser's fraud unit. We are feeding more and more high-risk broker investigations into our enforcement division so that we can meet our real desire, which is to reduce the time it takes to identify people who are really harming investors and move them out of the industry. And, third, we're culling far more data to try to identify risky brokers, even if not clearly violative brokers, and making that a significant focus of our exams. We're doing more and more branch office exams for that reason.
IN: You think that CARDS will play a role in this effort?
Mr. Ketchum: It's for exactly reasons like [those outlined above] that we want to take the next step with respect to our CARDS concept release and be able to have an even broader database. Our ability to move to a surveillance mode where we're able to identify concerns of specific securities, risky credit on an ongoing basis rather than based on complaints and exams would be a huge step forward. CARDS will be a critical step in that.
IN: You've received many comment letters about CARDS. What is the next step?
Mr. Ketchum: We have a few comments in. We will thoroughly evaluate those. We recognize this is a complex product. We are working with firms to help us think through various issues involved in the final design of a CARDS project. A large number of firms have been great about participating from that standpoint. My hope would be that we talk to the board about next steps in July.
IN: Do you think you have assuaged fears about investor privacy when it comes to CARDS?
Mr. Ketchum: Many of the fears about investor privacy should have been assuaged by the fact that we're no longer requiring detailed personal information. I have no doubt, when you look three to five years down the road, this is how all regulators are going to be able to work. It makes no sense with the capabilities to manage data today for us to be focusing our programming on visiting firms on a periodic basis. It is time for us to combine that with … ongoing surveillance. We'll be able to reduce burdens on firms and we'll be able to protect investors better. [CARDS] is absolutely the most important tool to do that.
IN: What BrokerCheck improvements should we anticipate?
Mr. Ketchum: We are looking toward the [April] board meeting and will have some discussions. We are going to do a thorough review of our database to identify instances where we see underreporting — and we will continue to look at the categories that should be disclosed. Stay tuned. After the board meeting, I think we'll have more to say.
IN: What is the status of the proposal to add a BrokerCheck link to brokers' websites and social media?
Mr. Ketchum: It will be back out publicly, I hope, in a couple more weeks. There are a just a few complexities with respect to how it works with social media. We will be putting that out for notice very shortly.
IN: What is the regulatory issue that keeps you up at night?
Mr. Ketchum: I always start with complex products, in terms of leveraged products, in an environment which is very uncertain with respect to interest rates and market performance. The selling issues, the conflicts issues around the industry and how the industry handles those are always issue one. The fixed-income market has become a more critical market in terms of individual investors. Both Finra and the [Municipal Securities Rulemaking Board] are just going to continue to focus attention there.