WASHINGTON – FINRA CEO Richard Ketchum says more needs to be done to keep an eye on the industry's bad apples – and to keep out the most rotten ones.
"I am disappointed with some of the hiring practices that continue to exist within the industry," Ketchum tells reporters at the regulator's annual conference.
He says that firms choosing to recruit brokers with a record of past offenses need to do so with a full understanding of the compliance risks and "with confidence that the person will responsibly manage people's money."
Ketchum, who is set to retire this summer, says FINRA will look at "everything we can do to hold firms responsible."
In a speech he gave at the conference, Ketchum emphasized the importance of creating strong cultures of compliance – and that those cultures are at risk when advisers with bad records begin to congregate in a single place.
FINRA recently said it will prioritize a review of firm culture, looking at the various ways the firm's promote compliance within its own ranks – or fails to. Ketchum emphasized that good regulation should be about more than catching bad actors; it should also help prevent abuses.
"As a regulator, we also want to understand the behaviors and practices that result in breakdowns," Ketchum told attendees.
He added: "There is no higher goal for a regulator than to be a positive force for firms building their compliance culture."
Ketchum says FINRA needs to look at these issues more carefully. Do firms tolerate breaches in conduct? Do they seek to mitigate compliance risks? Does the atmosphere at the branch office differ from that of the home office? And what kind of tone is being set at the top of the organization?
"Tone carries through to every aspect of the structures, policies and procedures," Ketchum says. "It is essential that a firm's leadership own the policies and procedures."
Recruiting deals for brokers to switch firms is a related area of concern for the regulator. The SEC recently approved a new FINRA rule requiring firms recruiting financial advisers to provide educational information to clients about switching brokerage firms. The rule is designed to get clients to ask questions about whether their investments will transfer, potential costs in doing so and potential conflicts of interest for the broker.
Incentives can create unintended consequences; and while Ketchum told attendees that he is encouraged by some firms' efforts to better understand those consequences, he also said that more work needs to be done.
In his meeting with reporters, Ketchum related his family's personal experience with the matter, saying that when his adviser changed firms, his family was bombarded with calls and emails about transferring their accounts.
"The pressure is clearly there," he says.
FINRA has come under fire recently from critics in Congress, notably Democratic Senator Elizabeth Warren, who has questioned FINRA's efforts to rein in rogue brokers.
Ketchum says that greater Congressional scrutiny comes with the territory, given FINRA's role as a Wall Street watchman.
"I obviously don't agree with some of the particular concerns expressed by both parties but I think it's entirely appropriate," he says.
In response to criticism that FINRA is too close to the industry, Ketchum observes that the self-regulatory organization's rules must first meet with SEC approval.
However, he also says that FINRA must always maintain its distance from the industry it is charged with overseeing.
"I've been associated with SROs virtually my entire career. I've seen where things can go wrong," he says.
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