Registered representatives will operate under a fiduciary standard no earlier than the second half of 2012, according to Finra chief executive Richard Ketchum.
And that timeline is “quite aggressive,” he said.
“If it occurs, the SEC would have to move through an implementation phase that would register one or more [self-regulatory organizations]. That process would take a period of time,” Mr. Ketchum said.
The Securities and Exchange Commission last month released a report that calls for brokers and advisers to be held to a uniform fiduciary standard. The SEC has proposed ways of strengthening the regulation of financial advisers, one of which is to designate the
Financial Industry Regulatory Authority Inc. as the SRO for the registered investment adviser side as well as for the broker side of dually registered firms.
If that occurs, Finra will have to build a new unit, Mr. Ketchum said.
“We would have to create a discrete board that would have responsibility for investment adviser issues, fill that board [and] staff up with people who are knowledgeable and understanding of investment adviser issues,” he said. “It would be difficult to imagine all that [happening] before the middle of 2012 or the latter parts of 2012.”
Mr. Ketchum addressed more than 500 brokerage industry professionals in Phoenix last week at the Financial Services Institute Inc.'s annual meeting. Several industry executives and consultants said Mr. Ketchum's projections were on the money.
“I think it's a very accurate depiction,” said John Simmers, an industry consultant and former board member of NASD, Finra's predecessor.
“I think he was being candid and ... left the impression that Finra would be there for the dual part if they were selected as the SRO,” he said.
“[Mr. Ketchum] added the additional caveat that Finra is always there if there's a [securities] transaction. I think the message is: Regardless of who is running the SRO, Finra will still enforce its regulations, and when there's a transaction involved, and if there's misconduct, Finra has jurisdiction,” Mr. Simmers said.
“The hardest track will be the congressional piece” and getting the legislation passed for a new SRO, said FSI chief executive Dale Brown. “I think [Mr. Ketchum] was very candid about Finra's views and was very forthright in his assessment of the landscape and what needs to happen.”
The FSI supports Finra as the SRO for investment advisers.
“These issues must unfold on parallel tracks,” Mr. Brown said.
“We cannot end up with a scenario where the SEC moves on fiduciary-duty rulemaking and we end up with a fiduciary duty and we've done nothing to solve the investment adviser exam issue,” he said. “That status quo is unacceptable.”
A new SRO would oversee such exams.
That issue is nettlesome for broker-dealers. Investment advisers are examined once a decade by the SEC, while broker-dealers, depending on their size, are examined every year or every few years.
Right now, when reps sell securities to clients, they must make sure that the investments are suitable. According to the SEC, the broker must consider a client's risk tolerance; other security holdings; financial situation, including income and net worth; financial needs; and investment objectives.
Investment advisers already sell investment products under the fiduciary standard, meaning that they must operate in the best interest of their clients.
Some investment advisers have questioned Finra's ability to regulate their profession.
A common criticism, even from broker-dealer executives, is that Finra's staff lacks professionals with experience in the brokerage industry and relies on lawyers with little hands-on experience in the broker-dealer world.
Mr. Ketchum acknowledged that criticism.
“We would be looking for very senior people as well as building a coterie of investment adviser oversight and responsible folks in the examination team that had experience in investment advisory firms, operating from a legal standpoint of advising investment advisers or compliance consultants,” he said.
Mr. Ketchum said that he doesn't have a sense how of much a change to a fiduciary standard would cost an individual broker or registered rep, either in terms of dollars or work hours.
“There are too many ifs to come up with the answer” at the moment, he said.
Finra still has plenty of work to do related to how a fiduciary standard will work for retail brokers, regardless if it becomes the SRO for investment advisers, executives said.
“Finra needs to come back with how they envision the implementation” of applying a fiduciary standard to brokers, said William Dwyer, president of national sales and marketing with
LPL Financial and this year's chairman of the FSI.
“That's going to bring up questions such as who is going to bear the cost of additional supervision and what the process is going to look like. And that's going to take time,” Mr. Dwyer said.
E-mail Bruce Kelly at [email protected].
