Finra walks fiduciary/suitability tightrope

Ketchum sees virtue in both standards, but can the two coexist?

May 17, 2009 @ 12:01 am

By Sara Hansard

Finra chief Richard Ketchum's call for a fiduciary standard for all advisers, even as he indicated that he would not want to significantly alter suitability rules for broker-dealers, highlights the difficulties inherent in harmonizing the two regulatory standards as the strife-torn industry moves towards establishing a single self-regulatory organization for advisers. Last Wednesday, the chairman and chief executive of the Financial Industry Regulatory Authority Inc. said in an interview: “We ought to move to a single standard, and I think it makes sense for it to be a fiduciary standard.” During the interview, however, Mr. Ketchum said that “suitability provides a level of specificity and value over and above a fiduciary standard” and argued that enforcement cases are easier to bring based on suitability. In a follow-up interview on Thursday in which he responded to critical reaction to the story posted on, Mr. Ketchum amended his comments. “I certainly didn't mean to suggest that suitability is a higher standard of care than the fiduciary standard,” he said. “The fiduciary standard is a different standard from suitability, and it is a very high standard,” Mr. Ketchum said. “[It should] form the basis for a common approach on the broker side as well as on the adviser side. It should be the fundamental cornerstone to look at the relationship with customers.” Some experts share his seeming ambivalence.

“A suitability standard is really part of a fiduciary standard,” said Duane Thompson, managing director of the Washington office of the Financial Planning Association of Denver.

“It's implicit that if you're putting the client's interests first, whatever recommendations you make need to be suitable for them,” he said, noting, like Mr. Ketchum, that more enforcement cases are brought based on suitability rules than on fiduciary standards.

Investment advisers, who are regulated by the Securities and Exchange Commission and state securities regulators, are held to a fiduciary standard that requires them to put their client's interests above their own. Broker-dealers are regulated by Finra under standards that require them to make suitable recommendations to their clients.

Although some experts on adviser regulation and industry officials welcomed Mr. Ketchum's willingness to accept a fiduciary standard, others questioned whether such a system would weaken the investor safeguards that it seeks to strengthen.

Suitability rules “are precise and bright-line,” said Columbia University School of Law professor John Coffee. By contrast, fiduciary principles “are much more aspirational and general.”

If brokers assumed fiduciary duties and also had to comply with suitability rules, “that would be optimal,” Mr. Coffee said.

“Traditionally, suitability has been a creature of SRO rules and is not found in the common law of fiduciary duties, said Charles Mills, a partner in the Washington office of New York law firm K&L Gates LLP who represents brokerage and investment advisory firms.

“But where you're being paid to render individualized investment advice, the concept of suitability is probably embodied in that relationship,” he said.

Mr. Coffee thinks that one motivation for Finra's moving to embrace the fiduciary standard is that “it diffuses the political objections to allowing broker-dealers to -perform the functions of investment advisers and be compensated in a manner similar to investment advisers.

“There are strong economic reasons why brokers might be willing to equalize the fiduciary standards between themselves and investment advisers, if, as part of the overall political compromise, they could also become entitled to use asset-under-management formulas,” he said.

Responding to those comments, Mr. Ketchum said that he didn't know if it would be politically astute for brokers to be willing to take on the fiduciary standard in order to get assets-under-management fees.

Many broker-dealers have em-ployees working for dually registered investment advisory segments of their firms, as well as on the brokerage side. For that reason alone, “it is a good idea for there to be a similar standard,” he said.

Other experts don't think that fiduciary standards and suitability rules are compatible.

“The notion that suitability provides a level of value over and above the fiduciary standard would be hard to establish,” said Neil Simon, vice president of government relations for the Investment Adviser Association in Washington, which represents investment advisory firms regulated by the SEC.


The IAA opposes a separate SRO for investment advisers and bringing advisory firms under Finra's jurisdiction.

“Fiduciary is the highest standard recognized under the law. There is far less evidence of investor abuse with the fiduciary standard,” Mr. Simon said.

Although he said it is “progress” that Mr. Ketchum has called for adopting fiduciary standards, Blaine Aikin, president and chief executive of Fiduciary360 LLC, is concerned that “we're going to slice and dice the fiduciary standard into a variety of "fiduciary standards lite' that would apply to a variety of different providers or circumstances.”

He cautioned: “What we must be talking about is the fiduciary standard, not a fiduciary standard.”

Fiduciary360 provides fiduciary training and is based in Sewickley, Pa.

If investment advisers are put un-der an SRO, many have suggested that Finra would be the logical body to regulate advisers.

Mr. Ketchum has pledged that if Finra became the SRO for advisers, it would work to “approach their industry in a non-broker-centered way. We would have to change in significant ways.”

That would include changing Finra's governing board structure to include advisory-firm representation, Mr. Ketchum said.

“We would need to work out proper disclosures and how it would work for complex broker-dealers who are engaged in investment banking, developing structured products, and proprietary trading,” he said. “To the extent a broker-dealer is providing broad-based advice, similar to what an investment adviser is doing, we would love to get to a single standard.”

He denied that Finra oversight would result in weakening fiduciary standards. “We respect the fiduciary standard investment advisers have.”

E-mail Sara Hansard at


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