What we learned from Madoff is that it makes no sense for two independent regulatory bodies to oversee investment advisors and broker/dealers, Richard G Ketchum, chairman and CEO of FINRA said in a speech at the SIFMA Compliance and Legal Division’s annual seminar in Arizona Monday.
“This case, in particular, highlights what can happen when a regulator like FINRA is only allowed to see one side of the business,” Ketchum said. “There is no doubt that Madoff and others have cynically designed their schemes to fit between the jurisdictional cracks to decrease the likelihood of detection.”
Day-to-day oversight is exhausting the SEC and state securities regulators as they act independently, Ketchum said. He highlighted the broker/dealer and investment advisor regulatory gap as the “most glaring example” of what needs to be fixed right now. What might make more sense, Ketchum suggested, is to expand FINRA’s authority to regulate investment advisors. Ultimately that decision will come down to Congress and the SEC, but Ketchum noted FINRA is “uniquely positioned from a regulatory standpoint” to construct an oversight program for advisors “quickly and efficiently.”
Totaling more than 11,000, investment advisors outnumber broker/dealers by at least twice as much. FINRA oversees 4,900 firms and conducts over 2,500 regular exams each year. “The SEC oversees more than 11,000 investment advisers, but in 2007 conducted fewer than 1,500 exams of those firms,” Ketchum emphasized. What is needed is not to dump FINRA’s current governance structure onto investment advisors, but to “tailor” a system for them.
“We do believe, however, that enhanced regulatory consistency is in the best interest of investors,” Ketchum said.
FINRA’s chairman also suggested applying a fiduciary standard to broker/dealers and that regulators should apply what is working best for each category in terms of oversight.
Pressure and criticism from investors is weighing heavily on regulators like FINRA. “(Investors) are waiting to see if we’re serious about redoubling our commitment to compliance,” Ketchum concluded. “They’re waiting to see if compliance can truly be flexible and adaptable to a shifting marketplace. They’re waiting to see if we really will eliminate the dangerous gaps in the system that jeopardize their financial well-being. But above all, investors are waiting to see if we deserve to earn their trust again.”