Calling a fiduciary rule for broker-dealers a “must,” Financial Industry Regulatory Authority Chairman and CEO Richard Ketchum laid out model guidelines Wednesday.
Ketchum said the standard is needed because too many brokers are pushing complex financial products on investors without appropriate fee and risk disclosures.
The regulator said a more stringent customer-focused standard for brokers other than suitability is also advisable because some firms continue to approach conflict management on a haphazardly and some fail to adequately discuss potentially higher fees involved in IRAs to permit a customer to make a fully informed decision.
He said the standard should be based on three essential tenets: active identification and management of firms’ conflicts; dramatically improved disclosure of risks associated with the product and product-related fees, firm and third party incentives; and more effective management of the compensation incentives to registered persons.
“The best interest standard should make clear that customer interests come first and that any remaining conflicts must be knowingly consented to by the customer,” said Ketchum.
To protect retail investors from conflicts of interest, the Finra CEO said the rules should require brokers to have an ongoing process to identify conflicts which could be costly to investors and develop written supervisory procedures to address how those conflicts would be eliminated or managed.
Also key to an effective fiduciary standard would be enhanced disclosures through an annual Form ADV-like document annually providing clear, plain English descriptions of conflicts, and all product and administrative fees, said Ketchum.
He advocated additional disclosures with either point-of-sale documents on conflict, risk and fee issues relating to a recommendation, or providing a client with a written, balanced explanation of the benefits of the product or strategy recommended.
Ketchum said brokers should also be required to clearly demonstrate their efforts to manage the conflicts imbedded in differential fee compensation. But he added he doesn’t think the goal should be to eliminate all fee differences across different investment products.
Ketchum said he believes the Securities and Exchange Commission has enough time to develop, propose and approve a fiduciary duty for broker-dealers before President Obama leaves office in January 2017.
Ketchum re-iterated his opposition to the Labor Department’s proposed fiduciary standard for retirement plan advisors by saying there are too many provisions likely to unfairly land brokers in the courts.
He said he is worried judges might draw sharp lines prohibiting most products with higher financial incentives, no matter how sound the recommendation might be.
The Finra chief cautioned the lack of useful guidance in the DOL proposed rule, if adopted, will lead many firms to close their IRA business entirely or substantially constrain clients.
The labor department proposal is not the appropriate way to meet that goal of investor protection, said Ketchum.
Finra CEO Questions DOL, Outlines Alternative Model B-D Fiduciary Guidelines
May 27, 2015
« Previous Article
| Next Article »
Login in order to post a comment
Comments
-
This article offers a refreshingly complete description of Rick Ketchum's comments on this issue, in contrast to much of the trade press coverage focused solely on dramatic headlines. Unfortunately, Mr. Ketchum overlooks several important facts in pushing SEC action as an alternative to DOL rulemaking to address conflicted retirement investment advice. The first is that the SEC's authority is limited to securities, while the retirement market is much broader and many of the worst abuses involve non-securities where the SEC has no ability to protect investors. Only the DOL can adopt consistent standards across all products recommended in retirement accounts, and only DOL can address loopholes in the definition of investment advice under ERISA. SEC action should be seen as a necessary supplement to, rather than replacement for, DOL rulemaking. Second, it is a pipe dream to suggest that the SEC can complete rulemaking before the end of this administration. The Commission has been studying the issue for a decade and actively considering rulemaking for over five years with nothing to show for it. There is no evidence of a consensus among the existing commissioners on the best approach. And, if news reports are correct, two of those commissioners are soon to depart. Meanwhile, Chair White has insisted on tying the fiduciary rulemaking to third party reviews for investment advisers, an entirely new and unstudied proposal with many complex ramifications to be worked out. Third, any approach that relies heavily on disclosure and consent to conflicts is doomed to be ineffective. Some academic research suggests that it could even be harmful. One of the most compelling aspects of the DOL rule proposal is the fact that it backs up its best interest standard with a requirement that firms take meaningful steps to rein in practices, common among broker-dealers today, that encourage their advisers to act in ways that are not in customers' best interests (e.g., setting quotas for the sale of certain products and basing bonuses or payouts on success in meeting those quotas). Here again, the SEC has been studying the issue since the Tully Commission report in the 1990s without taking meaningful action. FINRA's recent study of conflicts stopped at recommending unenforceable "best practices." While we welcome Mr. Ketchum's support for a best interest standard and new restraints on conflicts, it cannot substitute for DOL action for the reasons noted above. If he has practical suggestions for how to improve the DOL rule, he should offer them. The DOL has made clear that it welcomes such input. It is unfortunate that he has chosen instead to echo industry's exaggerated criticisms of the DOL rule proposal while offering an incomplete solution to the problem of conflicted retirement investment advice.