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Rick Ketchum reveals plan for advisor oversight at FSI conference

FINRA CEO promises light touch on rules, lays out political strategy

Tuesday, February 1, 2011 – 5:45 AM by Elizabeth MacBride
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Rick Ketchum: The SEC has acknowledged that it cannot oversee advisors with its current level of funding.

Before a crowd of more than 500 people in the independent broker-dealer industry, FINRA CEO Rick Ketchum said that if FINRA were named the SRO overseeing investment advisors, the organization would not move to aggressively put a rules-based system on investment advisors.

He also laid out a political scenario that could result in FINRA’s installation as advisors’ overseer, a change that would require Congressional action.

He said there was a chance – albeit a fairly small one — that FINRA could be advisors’ regulator by early next fall and that an exam program could be in place by late in 2012. See Is FINRA oversight a fait accompli? It’s starting to feel that way..

The FSI is holding its conference in Phoenix this year. It began yesterday and ends Tuesday evening. With 590 attendees, more than 300 of them IBD employees, the conference is the largest in the group’s history.

Late surge

There was a late surge in enrollment in the past two weeks — which might have come as a result of the spate of regulatory news out of Washington, D.C. as the SEC issued studies about how to increase protection for investors receiving financial advice. See: The RIABiz list of winners and losers in the wake of the SEC’s fiduciary study.

One study laid out a plan for applying the fiduciary standard to broker-dealers and issuing more rules for investment advisors. The other laid out options for more oversight of investment advisors.

Ketchum said the next few years are going to be incredibly important as details of the new regulatory regime are worked out. “For better or worse we are going to make history,” he said.

More resources

Ketchum has long argued that FINRA has the resources to audit advisors more frequently than the SEC – a prospect that many advisors, accustomed to operating under the SEC, which audits advisors only about once every 10 years, have opposed. Advisors are regulated under a principles-based system; broker-dealers deal with a rules-based system. Debate continues: Fiduciary standard no panacea.

Ketchum said, “I wouldn’t expect the same rule-based approach to apply across the board,” though noting that that SEC had identified several areas in which RIAs might face more regulation, including advertising and education requirements.

“I don’t see FINRA as being involved heavily in rule-making efforts,” Ketchum said. “We’d be involved in enforcing the 40 Act and we’d be looking for SEC guidance.”

He said he envisioned a discrete board, the majority of whom would be from the public, and others from the industry side with investment advisor experience.

He also said FINRA would need a relatively small but discreet staff, and that the SRO would build pods within its district offices, but would not create two different exam programs.

Expertise and culture

“We have to bring in a level of expertise and culture and understanding that reflects that side of the business,” he said.

Congress would have to vote to make FINRA advisors’ regulator. Ketchum outlined a set of political dominoes that could conceivably topple to make that change happen by early next fall, but he acknowledged “that will be a heck of an effort itself. It’s extremely ambitious.”

The SEC released a study to Congress that named three options for improving oversight of RIAs, including user fees to fund more SEC audits, one or more SROs, or FINRA oversight of hybrid advisors.

The most important element in that study, Ketchum said, was that ... “the SEC acknowledged very clearly that with their present funding … they cannot regulate investment advisers.”

With additional SEC funding looking unlikely, Congress might well decide on FINRA as an option.

Ketchum noted that powerful figures on both sides of the Capitol seem open to FINRA as advisors’ regulator.

Chairman Spencer Bachus (R-Al.) was quite supportive. We’ll get a careful hearing, “ he said, naming the new chair of the House Financial Services Committee. On the Senate side, he said, “the new Chairman (Tim) Johnson (Senate Banking Committee) has certainly indicated in conversations that he’s open to hearing the pros and cons.” Johnson is a Democrat from South Dakota.

He said that there could be hearings on the topic in the spring. He also said FINRA is already positioning itself by considering what the exam program would look at.

“I would expect it would be rolled out carefully and in pieces.”

All ears

The FSI crowd was largely sympathetic. FSI was one of the first organizations to endorse FINRA as advisors’ SRO. Broker-dealers have long complained about competing with advisors who are subject to SEC regulation and much less frequent examinations. One audience member complained about having reps flee for the RIA side in order to lower compliance costs.

As for the idea of complying with the fiduciary standard, several independent broker-dealer executives said they did not shy from the prospect.
“The advisors we are lucky enough to work with already see themselves in that relationship with their clients,” said Donald Jaynes, first vice president of CadaretGrant, a Syracuse, N.Y.-based IBD with 970 advisors.

Ketchum noted – and the executives agreed – that this is merely the beginning of a long process of change. “It’s all still up in the air,” said Marypat Ganely, also a first vice president of CadaretGrant.

Elizabeth’s note: The FSI designed its session with Rick Ketchum as a Q&A session. Not wanting to be obnoxious or push my way in front of a broker-dealer who’d paid to be at the conference, I waited till the end to ask Ketchum one question that’s been on my mind since the SEC said it planned to apply the fiduciary standard to broker-dealers: Should conversations in a discount brokerage setting be defined as personalized investment advice, and therefore be subject to the fiduciary standard?

I’m not sure what Ketchum’s response meant, but I am including it here because I believe the question is important.

Here’s what he said: “I think that the SEC could design a system that applied to some of those relationships. ... I do believe that you could apply a fiduciary standard to a wide variety of relationships because I think the standard is fact-based.”

Perhaps someone more lawyerly than I can parse his comment for meaning.



February 1, 2011 — 5:13 PM

Merrill just paid a fine for frontrunning trades, Insurance based BD’s like Ameriprise have been selling overpriced, poor performing propriatary funds and annuities at their client’s expense for years and Index annuities are sold to 80+ year-olds every day. Let’s all take a hard look in the mirror and start being honest with ourselves in both the BD & RIA community.

More Regulation = Higher Costs for clients – it will not catch more fraudsters. One of the many reasons advisors like myself moved into the RIA world from the BD world is to split cost savings between the business and our clients. This is big government at work increasing regulations without really protecting people. If your naive enough to think that more pages of disclosures, a series 7 like exam for RIA’s and more reviews of font sizes on advertizing will help clients, Goldman’s got a social networking site selling coupons you should probably pay top dollar for.

How about these simple rules – If you manufacture product – you don’t distribute it directly to clients (My doctor shouldn’t work at Medtronic).
If it looks like an investment product it should be held to the same standards as all other invetsment products (oil & gas, Index cd’s and annuities …).
Maximize the use of technology to minimize regulation costs. If you use something for advertizing you download it to the FINRA or SEC site. Reports, statements, client notes are all kept electronically on a FINRA or SEC secured site. Cloud computing at it’s finest.
Every advisor should have a 3rd party custodian. If clients, finra, the SEC, state regulators … want to check up on clients assets it’s pretty easy to get that info if there is a 3rd party custodian, and make custodian’s liable if any asset on their statements turn out to be bogus.

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