Ketchum catches up Broker Dealers on the latest in Financial Regulation and FINRA Exams at the NAIBD Fall Symposium
"I won't pretend to have any insight [regarding the Dodd Frank Act]" - powerful words coming from Financial Regulatory Authority (FINRA) CEO Rick Ketchum at this October's National Association of Independent Broker Dealers (NAIBD) Fall Symposium.
Ketchum did, however, have some thoughts to share with the broker dealers gathered at the NYSE for the full day conference. He offered to the audience that he is in favor of a uniform fiduciary standard for both Investment Advisors and Broker Dealers, noting as his reasoning the paradox that 88% of investment advisor representatives are dual registered as registered representatives and at the advisor they are currently subject to a fiduciary standard whereas with the broker dealer they are not subject to the same fiduciary standard. Going forward, broker dealers should be tuned into the developments in this call for a uniform fiduciary standard, and in the event this regulation passes, expect that it will be a priority focus for FINRA's during subsequent exams.
While FINRA currently conducts exams for broker dealers under its membership, it remains to be seen who will be responsible for overseeing and examining investment advisors. Ketchum notes that the SEC does not have the resources to complete exams at a standard consistent with the FINRA model making it difficult for them to take additional firms under their jurisdiction. FINRA Executive Vice President, Susan Alexrod, FINRA added that 20 new regulatory coordinators across the country have been hired to uphold its responsibilities and serve as a resource to brokers. In order to be able to handle the onslaught of new firms with new business models, FINRA needs to understand the unique nature of a firm before it begins an exam, suggesting there would need to be a certain level of training required in order for FINRA to conduct investment advisor examinations. Alexrod reiterated this point, stating that examinations need to be conducted by examiners who understand the firm. Ketchum and Alexrod both acknowledge that the FINRA exam program needs to improve which Alexrod says will be achieved by moving away from a checklist approach with mandatory elements that may not apply from firm to firm and Ketchum adds will be improved through a risk based model with more flexibility to look at areas of greater risk and focus on the actual business procedures.
The discussion regarding a uniform fiduciary standard being applied to broker dealers and consideration of FINRA as an SRO to oversee investment advisors indicates that some of the regulatory gaps between broker dealers and investment advisors could be closing. That said, the different styles of legislation for broker dealers vs investment advisors (advisors subject to a principals based approach vs. broker dealers governed by a rules based approach) leaves some gaps difficult to fill, even with the regulatory changes being considered and implemented through the Dodd Frank Act.
The nuances and effects of the Dodd Frank Act remain to be seen even by the most prominent figures in the financial and regulatory industry; however, that said, both FINRA and the SEC are gearing up to understand on a deeper and more practical level what these new regulations mean through the rulemakings occurring over the next year.
