Regulation And Legislation

Ketchum: Finra’s focus on conflicts of interest compounding

SRO's boss says issue now a top concern for regulator; also homing in on disclosure for complex products

The Financial Industry Regulatory Authority Inc. is focusing on conflicts of interest at broker-dealers and whether firms are on top of the variety of complex financial products flooding the market right now.
Those were two substantial themes in Monday morning’s remarks by Richard Ketchum, the chairman and chief executive of Finra. The self-regulatory organization kicked off its annual meeting, which is in Washington this year, on Monday.
Mr. Ketchum said that, “given the tremendous uncertainty of markets today,” firms must have in mind how they “assess and disclose” conflicts. Finra and broker-dealers both understand that conflicts exist, but, he says, firms need to take a step back, acknowledge there are risks and ask if business practices “put your firm’s or employees’ interests ahead of investors’.”
Finra will talk to large firms about this issue later this year.

RELATED ITEM What Ketchum said — in full

Mr. Ketchum next highlighted complex financial products, and asked, “Are these products appropriate” for clients who are looking for yield in a zero interest rate environment? There is a “wide and dizzying” array of complex products today in the market, he said, adding that, regardless, the “suitability rule remains in effect.”
Reps should discuss how the product will perform in various markets and how the customer could lose money, Mr. Ketchum said. Reps also need to clearly explain the costs, so broker-dealers may need to focus more on training brokers about the product.
The disclosure for many new, complex products is fair to good, Mr. Ketchum said. But for firm and brokers, the “challenge is the handoff to a wide number of financial advisers,” he said. “Financial advisers should be able to write down on a single page why this product is in the best interest of the client. The time to do this is not later, but now.”
Mr. Ketchum also said that Finra is focusing on algorithmic trading and how firms create tests and controls for such trading. The industry regulator also wants to raise the awareness in the general public of BrokerCheck, its system that houses business profiles, including disciplinary histories, of individual brokers and firms.