Wall St. critic Warren grills Finra's Ketchum on regulator's ability to protect investors

The U.S. senator raised doubts on Thursday about whether the financial industry can police itself

Mar 3, 2016 @ 1:49 pm

By Mark Schoeff Jr.

Sen. Elizabeth Warren, D-Mass., a leading Wall Street critic, raised doubts on Thursday about whether the financial industry can police itself.

At a Senate Banking subcommittee hearing, Ms. Warren pressed Financial Industry Regulatory Authority Inc. chairman and CEO Richard Ketchum on what the industry-funded self-regulator is doing to protect investors.

Ms. Warren cited a recent academic study asserting that one in 13 brokers regulated by Finra has committed some kind of misconduct that is part of their records. It also shows that half of advisers with ethical lapses are fired but 44% of them are rehired within a year.

Under questioning by Ms. Warren, Mr. Ketchum said that Finra is addressing recidivism. But the answer didn't satisfy the senator.

“You're looking at it, but you're not taking them off the street,” Ms. Warren said.

Mr. Ketchum replied, “We do when they violate the rule. We bar hundreds of [registered representatives].”

The study by professors at the University of Chicago and the University of Minnesota also found that “misconduct is concentrated in firms with retail customers and in counties with low education, elderly populations and high incomes.”

The malfeasant firms and brokers are preying on the most vulnerable client populations, according to Ms. Warren.

“We're talking about a real risk here,” she said to Mr. Ketchum.

The Finra chief said that the organization targets the problems brought up in the study.

“That's exactly the risk we look at with respect to our exams and enforcement investigations,” Mr. Ketchum said. “And that's why many of those people get barred every year.”

Finra must do better, Ms. Warren asserted.

“You obviously are not getting them out of the industry,” Ms. Warren said. “They're still there. They're there in big numbers and they're concentrated in places where they're most likely to encounter unsophisticated consumers — and I think that's a real problem we've got.”

She also brought up a study released last week by the Public Investors Arbitration Bar Association that showed that a total of $62 million in Finra arbitration awards in 2013 were not paid.

“Something should be done about it,” Mr. Ketchum said. “This is an issue we want to be part of, [that] we want to work with the [Securities and Exchange Commission] on. It is a real concern.”

Ms. Warren was not assuaged on either topic by Mr. Ketchum's responses.

“They're serious issues that affect ordinary investors,” Ms. Warren said. “Finra is supposed to be looking out for these folks, not for the advisory firms, and I hope you will address these issues.”

The exchange came during a hearing that focused on a different topic, equity market structure.

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