Richard Ketchum, the chairman and chief executive of the
Financial Industry Regulatory Authority Inc., told a gathering of brokerage firm executives that his group will be more aggressive about investigating the advisory activities of their brokers — regardless of whether it
gets full regulatory authority to oversee investment advisers.
“We will not stop if we see investment adviser activities that jeopardize clients” in the course of examining broker-dealers, Mr. Ketchum said at the National Association of Independent Broker/Dealers' fall symposium at the
New York Stock Exchange on Friday.
“Expect us to be making more inquiries about that. We will be looking over the wall at dually registered” advisers, Mr. Ketchum added.
Finra is the self-regulatory organization for broker-dealers, it also is hoping to get authority to be the prime regulator for independent investment advisers as well. “We would love to have an environment where Finra was regulating investment advisers and broker-dealers,” Mr. Ketchum said.
Following his address, he told reporters that if Congress passes legislation endorsed by the Obama administration to impose a common fiduciary standard of care on brokers and advisers, the Securities and Exchange Commission will act quickly to design the standard. The House Financial Services Committee is currently putting finishing touches on a bill expected to include fiduciary-standard requirements that the SEC would be asked to implement.
Finra is hoping that the SEC grants it the responsibility, but the Financial Planning Association and other groups representing independent advisers want a new self-regulatory authority to be created, arguing that Finra's view is too narrowly tied to the brokerage industry.
Mr. Ketchum said the fact that each year the SEC examines only about 9% of the approximately 13,000 registered investment advisers under its jurisdiction creates “an environment that poses risks for investors.” In his talk to the NAIBD, which represents small broker-dealers, he also outlined the major “worries” Finra has about broker-dealer practices.
Coordinated Capital Securities Inc. chief executive Mari Buechner, a member of the Finra board, said she and many other small brokers are concerned that a fiduciary standard could hurt small investors because some firms may be afraid of taking on additional responsibility. “Certainly, no one in this room is recommending a lower standard of care,” she added.
Mr. Ketchum said that in addition to concerns about brokers' current advisory activities, Finra has several other worries that it will be investigating. “We need a better understanding” of how social networking tools such as Twitter are being used by advisers to communicate with clients, he said. “Each time technology has advanced, it has created new exposures for registered persons and investors,” he said.
Other areas of concern include:
• Variable annuities, which Mr. Ketchum said continue to generate “a substantial number of complaints” from investors. The regulator is concerned with the continuing issue of “flipping” sales of the products and also with issues such as:
• The solidity of guarantees from insurance companies at a time when many of those issuers are looking at their risks.
• Abuses in sales of investment products to elderly investors and supervisory procedures to manage such sales.
• Methods for overseeing practices of brokers in dealing with clients who suddenly inherited or otherwise acquired new wealth.
• The ability of brokers and their supervisors to understand new and evolving products, and to accurately represent them to clients.
Separately, Mr. Ketchum attempted to justify fee increases on Finra members that the group has proposed to the SEC. The regulator operated at a loss in 2008, expects its revenue this fiscal year to be “fully $100 million or more lower” than anticipated, and has cut its expenses by around $70 million this year. But he said the organization, which also had an investment loss last year, needs to replenish its coffers.
“What we can't do is to ignore our regulatory responsibility … which didn't suddenly disappear,” Mr. Ketchum said. “We can't fire 25% of our people just because revenues are down.”
