Many RIAs who have met with Finra's CEO, Rick Ketchum, have come away favorably impressed. After watching him be interviewed by Dale Brown of the Financial Services Institute in late January, I came to see why.
Let me begin by saying that I've never held Finra, or its predecessor organization, the NASD, in particularly high esteem. Despite a staff of dedicated, intelligent, hard-working individuals, I don't think they've done a very effective job of regulating the brokerage business.
Maybe there is something inherent to the concept of self-regulation that leaves regulators perpetually chasing their tails and fighting yesterday's battles. I wasn't surprised when they chose to change their name early in the last decade after suffering serious reputational damage in the wake of the tech bubble.
That name change came several years before a former Nasdaq non-executive chairman, Bernie Madoff, elevated the art of Ponzi scheming to a height no Wall Streeter had ever scaled in the long history of fraud.
All this notwithstanding, Ketchum came across as an exceptionally intelligent, well-meaning person with a remarkable understanding of both the securities and investment advisory businesses. He seemed sincere in his belief that professionals dealing with retail investors need to be held to a fiduciary standard of conduct.
The combination of a long-term savings shortfall and the destruction of wealth coming out of the financial crisis have made other alternatives unacceptable to many. Ketchum gets it.
In the past, some in the brokerage business have felt that Finra's cowboy style of regulation plays to the media. Consumer advocates long have argued that it covers up a coziness with the brokerage business. But there are those in both camps who would like to see RIAs get a taste of it as well. What the RIA business needs isn't tougher regulations; it's more frequent examinations and inspections.
Ketchum knows this. He realizes the advisory business is fundamentally different and that whoever regulates needs to bring "a level of expertise and culture that understands what 1940 Act professionals' environment is." There is an understandable concern among RIAs of a new regulator walking in who "doesn't understand your approach," he added.
But whatever happens, numerous thorny issues need to be resolved. When it comes to the issue of state regulation of RIAs, for example, the SEC does have the same degree of oversight responsibility for the states like it does for Finra, Ketchum remarked.
There's another problem with delegating the future regulation of RIAs to Finra, however. And that's the fact that there is no guarantee the self-regulatory agency will always be run by someone with the knowledge and intelligence as Ketchum.
Evan Simonoff, Editor-in-chief
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