Even in the face of a decline in the number of retail broker-dealers and a recent financial loss that led to an increase in membership fees, Finra has set its sights on new areas of growth, according to Richard G. Ketchum, its chairman and chief executive.
The
Financial Industry Regulatory Authority Inc., which oversees 4,416 broker-dealers and 629,278 registered representatives, wants to expand its role as a regulator of both retail investment professionals and institutions, he said.
At the same time, the regulator wants to provide transparency through wider use of its audited quote and trade information system for equities — the order audit trail system — and increase investors' use of BrokerCheck, the system that provides information about brokers and firms.
Mr. Ketchum outlined his strategic vision for the next few years in an interview last week during Finra's annual meeting in Washington. His goals are critical, as Finra must adapt to rapid changes in the securities industry.
According to statistics on its website, the number of broker-dealers registered with Finra has declined by 11% over the past five years, while the number of reps has declined by 6%.
Mr. Ketchum acknowledged that broker-dealer membership “is down a significant percent,” but said that the number of registered individuals is “essentially flat” after a big drop in 2007 and 2008.
He acknowledged, however, that the decline in Finra members is a concern.
“We always worry about that,” Mr. Ketchum said.
In its efforts to serve its broker-dealer members, Finra is meeting strong objections to its decision last month to hike a number of user fees that it charges to help cover an operating loss.
“Fee increases, to some degree, are sometimes going to happen,” Mr. Ketchum said. “From a strategic standpoint, Finra's great fortune is that we sit with a very substantial amount of retained earnings, thanks to the Nasdaq transaction.”
Finra is the successor to NASD. In 2006, NASD separated from Nasdaq when it sold its ownership stake in the exchange.
Meanwhile, as Finra's membership has declined, the number of registered investment advisers appears to be growing.
According to consulting firm Cerulli Associates Inc., the number of RIA firms has increased dramatically. Between 2004 and 2010, the number of RIAs rose 31% to 16,541.
Larger RIAs are regulated by the Securities and Exchange Commission, and smaller ones by state regulatory agencies.
The SEC has been criticized for lax examination of RIAs. Last year, it was able to examine just 8% of the nation's approximately 12,000 RIAs, primarily due to a lack of funding.
Finra, which examined 58% of its member brokers, would like to become the self-regulatory organization for RIAs and has been lobbying for that assignment. A bill in the House would shift regulation away from the SEC to one or more SROs, one of which might be Finra.
RIAs have expressed opposition to Finra's becoming their SRO, claiming that its rules-based approach to regulation is a poor fit for their industry, which adheres to a fiduciary standard.
Yet Mr. Ketchum sees a void when it comes to RIA regulation.
“Somebody needs to step up the oversight of investment advisers; it's critical,” he said.
Mr. Ketchum added: “Certainly, the vast majority of large, medium and small firms are emphasizing the [RIA] side of the business. That's why we've always felt it would be better if there was an SRO for investment advisers, too, because the business is integrated” between broker-dealers and RIAs, he said.
He said that the fiduciary standard to which investment advisers are held is sound.
“But that doesn't mean abuses don't occur. You need to be in there looking, and the SEC simply doesn't have the resources to do that now,” Mr. Ketchum said.
“Whether it's the SEC and states' increasing resources, as unlikely as that seems, or whether it's Finra or another SRO, that needs to happen,” he said.
The second and third pieces of Mr. Ketchum's broad vision for Finra are, respectively, to track order flow information for stocks and expand its oversight of exchanges.
“We think the world is moving to a consolidated [order] audit trail [system]. And the logical way to operate that consolidated audit trail is OATS information, and we'd like to be active from that standpoint,” Mr. Ketchum said.
“We do think there is great benefit in having a single SRO that has surveillance responsibility across all the equity-trading markets,” he said. “We now have responsibility of 80% of those markets, with Nasdaq and NYSE, and we'd love to continue to expand that, and we'd love to be able to provide the order audit trail.”
PRIMARY OBJECTIVE
The primary objective for Finra, Mr. Ketchum said, is “to continue to get better at our job of broker-dealer oversight.
“That means using technology to find and focus on areas that pose an increase in real risk,” he said.
Finra also needs to make sure it stays on top of the larger firms as they develop, innovate and create products, Mr. Ketchum said.
Mr. Ketchum's experience in Washington is an advantage, said Lisa Roth, chief executive of Keystone Capital Corp.
“There's too much at stake for the industry and investors to allow Congress to solve these problems,” she said. “Finra needs to develop a solid, thoughtful plan as both a business and a regulator, and convince lawmakers that it should happen.”
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