Finra is stepping up its use of data to identify brokers with a record of compliance problems who keep resurfacing, and is warning firms not to rehire them.
In
an address Monday at the
Financial Industry Regulatory Authority Inc.'s annual conference in Washington, Finra chairman and chief executive Richard G. Ketchum said brokers with checkered backgrounds can undermine a firm's culture and turn it into a place that harms investors.
Firms that hire such brokers will receive stronger scrutiny from Finra, the industry-funded broker-dealer regulator.
“No firm that tolerates such a concentration of 'high-risk' advisers should do so without expecting searching questions from Finra as to the special supervisory steps they have taken to ensure no further bad actions,” Mr. Ketchum said.
Earlier this year, Finra
launched an exam designed to assess firms' institutional cultures and whether they encourage ethics and compliance with securities rules. It's too earlier to draw conclusions, but Mr. Ketchum said he is encouraged by the preliminary results.
“Many firms are paying attention to culture and managing conflicts, [but] there is still a lot of work to be done,” Mr. Ketchum said.
He said the goal should be to establish a culture that “puts investors first.” Important steps to achieve such an atmosphere include eradicating “group think,” avoiding a “winner-take-all” attitude and setting a “tone at the top” that encourages compliance and working on behalf of investors.
The winner-take-all approach manifests itself in compensation incentives that encourage brokers to think of their own payouts before what is best for clients. Mr. Ketchum said firms must review incentives regularly and monitor whether they change broker behavior.
“In those circumstances where it results in sales practice violations, it will result in significant penalties,” Mr. Ketchum later told reporters.
But he also said he is "encouraged by the steps that firms are taking to test compliance policies.”
As he has through much of his seven-year tenure leading Finra, Mr. Ketchum reiterated that a best-interest standard for brokers is the “direction we must go.”
Investment advisers already must meet such a bar, while brokers are held to a less stringent suitability standard.
“The challenge of how you deal with good people making bad decisions and how you try to reduce or provide a direction for them to hold on to make those decisions correctly I think, in reflection, is more and more important than it's ever been before,” Mr. Ketchum said.
This year's conference will be the last for Mr. Ketchum as leader of the organization. He announced his retirement last year. He will step down when the Finra board names his successor.
In his meeting with reporters, Mr. Ketchum did not reveal when the transition will take place.
“I hope that a decision will be made in June,” Mr. Ketchum said. “But I don't know when that will occur and I don't know who that will be.”
