From the June 2010 issue of Investment Advisor • Subscribe!

B/D Briefing: FINRA's Ketchum Sees a Fiduciary Future for B/Ds

Inappropriate sales of VAs to seniors at top of FINRA regulatory radar

As the Senate continued its debate on Senator Chris Dodd's financial services reform bill in mid-May, members of Congress were wading through a series of fiduciary amendments, but as of press time no fiduciary amendment had actually been debated on the Senate floor. Richard Ketchum, chairman and CEO of the Financial Industry Regulatory Authority (FINRA), told attendees at the Insured Retirement Institute's (IRI) regulatory conference in Washington in late April that he believed a fiduciary standard for all types of advice givers can indeed work, and that a some sort of fiduciary standard would be a part of broker/dealers' future.

It is clear, Ketchum said, that "whatever comes out of [financial services reform] that there will be a focus on a common standard from the standpoint of broker/dealers of all sorts and investment advisors." It is unclear, however, "whether that will involve something that provides the SEC actual rulemaking authority at the beginning as the House bill does--or whether the Senate bill as it exists will result in the final legislation to push the SEC to have a study with respect to this area."

Ketchum went on to say that "everything I see from the standpoint of legal analysis with respect [to a fiduciary standard for all advice givers] ... suggests it can [work], all the way down to firms that may offer a very limited number of products, as long as the offerings are carefully disclosed, the alternatives that exist in the marketplace are understood by the investor, and the conclusion is made that the recommendation is in the best interest of customers.

"None of that is simple or 'uncomplex,'" Ketchum said, "or suggests it should be solved in a single wave of a wand by folks in the Congressional sector. It does suggest, therefore, that either of the bills in their present state, whether it be the House or Senate Bill, have it right, and that the right entity to make those careful analyses should be the SEC."

While fiduciary duty will continue to shape financial services going forward, Ketchum also noted at the conference that the United States is "on the cusp of an era in which the work of anyone involved with annuities, insured retirement products, and retirement planning will play an increasingly important role in the nation's economic security." He cited a recent report from the Administration on Aging, part of the Health and Human Services Administration, which found that while people 65 and older represented more than 12.4% of the U.S. population in the year 2000, they are expected to account for over 19% of the population by 2030. "This aging of the population will foster heightened interest in, and demand for, a wide range of retirement-related products," Ketchum said.

Ahead: A Focus on Annuities

Going forward, Ketchum said in his remarks, "Heightened interest in annuities from consumers and the [Obama] Administration will be accompanied by continued scrutiny from regulators. It has to be that way if indeed those products continue to earn and gain the confidence that they truly should have." He noted FINRA's particular concern in the inappropriate sale of variable annuities to seniors. "It is extremely disturbing--and unacceptable--that many abusive sales concerning seniors involve variable or indexed annuities."

Today, Ketchum said, a cornerstone of FINRA's regulation of variable annuities is FINRA Rule 2330, formerly NASD Rule 2821, which governs variable annuity sales practices. "Parts of the rule--those dealing with recommendations and training--took effect in May 2008. The rule's remaining provisions, concerning principal review and supervision, took effect in February of this year."

Carlo DiFlorio, the new head of the Securities and Exchange Commission's (SEC) Office of Compliance Inspections and Examinations (OCIE), who also spoke at the IRI conference, said that of the 800 exams that the SEC has performed in the last year, 80 have been focused on the variable products area, with some of those cases being referred to the SEC's enforcement division.


Washington Bureau Chief Melanie Waddell can be reached at mwaddell@investmentadvisor.com.
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