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- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
Richard Ketchum, chairman and CEO of the Financial Industry Regulatory Authority (FINRA), on Monday addressed concerns from brokers and advisors over whether their test scores would be revealed on BrokerCheck after the site's recent revamp.
Test performance “is not the type of information [FINRA] is interested in disclosing,” Ketchum said at FINRA's annual conference.
Right now, Ketchum told the nearly 1,000 attendees of the conference in Washington, nearly “90% of investors make decisions about the investment professionals without first using BrokerCheck. We want to change that by raising awareness of the tool and providing the kind of information that helps investors make good decisions.”
FINRA announced on May 17 its latest round of updates to BrokerCheck to help users more easily access broker-dealer and investment advisor registration information.
Several of the changes implemented by FINRA address recommendations made in a January 2011 study by the Securities and Exchange Commission (SEC).
Those latest improvements now give investors:
- centralized access to licensing and registration information on current and former brokers and brokerage firms, and investment advisor representatives and investment advisor firms;
- the ability to search for and locate a financial services professional based on main office and branch locations, and the ability to conduct ZIP code radius searches (in increments of 5, 15 or 25 miles); and
- access to expanded educational content available on BrokerCheck, including new help icons that clarify commonly referenced terms throughout the system and within BrokerCheck reports.
Ketchum asked member firms on Monday to join FINRA and “collectively focus on how we can use BrokerCheck to create value for investors.” Ketchum reviewed the changes FINRA made to BrokerCheck two years ago, which included adding disclosures of criminal convictions, civil injunctions, customer complaints and records on former brokers whose registrations have terminated within the last 10 years. For the next phase of changes to BrokerCheck, he said, FINRA is “interested in ideas for expanding the range of information we disclose in BrokerCheck, updating the way in which that information is presented, and increasing investor awareness of BrokerCheck.”
Challenges and Next Steps
Ketchum also called on brokers and advisors to ensure they are identifying conflicts of interest and placing clients' interests first. He outlined three ways in which firms and regulators can together do just that.
First, Ketchum called on firms to do a better job of assessing—and disclosing—conflicts.
“We understand that conflicts exist in the financial services industry. We need to take a step back, acknowledge that there are risks and look at how we handle those conflicts,” he said. Ketchum pointed to a directive issued by Stephen Cutler, who was director of the SEC’s Division of Enforcement nine years ago, which asked firms “to undertake a top-to-bottom review of their business operations with the goal of addressing conflicts of interest of every kind.”
Second, he called on firms to ensure that the products they sell are “appropriate” for each investor. Ketchum reiterated the concerns FINRA has had about firms’ sales of complex products, noting the regulatory notice FINRA published in January, as well as the enforcement actions the regulator brought involving complex products where firms didn't adequately supervise the sale of the products, the recommended products were unsuitable for the investors, or the sales materials were misleading.
“Before recommending a complex product to a retail customer, your financial advisors should be discussing the features of the product, how it is expected to perform under different market conditions, and the product's risks, potential benefits and costs,” Ketchum said. “This means describing the circumstances under which the customer could lose money, not just those under which the customer would earn money. It also means explaining carefully the direct and imputed costs your client will incur and, where applicable, the fact that your firm or an affiliate is on the other side of the transaction.”