FINRA's Ketchum: Disclosure a 'Key Ingredient' to Fiduciary Duty, but Not Sufficient Alone

Richard Ketchum, chairman and CEO of the Financial Industry Regulatory Authority (FINRA), said Tuesday that as the industry moved toward a unified fiduciary standard for brokers and advisors, disclosure was a “key ingredient” that’s needed to address fiduciary issues, but that disclosure “alone is not sufficient.”

In moving toward a fiduciary standard for brokers, Ketchum (left) said that the broker-dealer industry needs “to get away from today’s environment in which account statements contain too much legalistic information, leaving them downright turgid, and causing investors to simply ignore them.” This, he said, is a “fundamentally flawed approach to disclosure.”

Ketchum suggested in his speech at FINRA’s annual conference in Washington that firms ask questions to gauge their relationships with customers. Ketchum said BDs should ask themselves: “’How do we interact in an effective way with investors? How do we foster knowledge and understanding among investors? And how do we deliver that message, both with respect to existing technology tools and with respect to how your financial advisers go through the message?’”

Ketchum noted FINRA’s proposed rule that addresses these questions, and requires firms, at or prior to commencing a business relationship with a retail customer, to provide a written statement that describes the types of accounts and services it provides. Firms would also be required to disclose the conflicts associated with such services.

The fundamentals of a fiduciary relationship, Ketchum noted, are to “avoid conflicts where possible, fully disclose them where not, and take actions—and be able to justify those actions—as being in the best interests of customers.”

As to FINRA’s bid to become the self-regulatory organization (SRO) for advisors, Ketchum noted in a press briefing after his speech that while “it’s too early to tell” if Congress will ask FINRA to be advisors’ SRO, and also “difficult to predict” whether Congress could pass such legislation authorizing such a move this year, the Securities and Exchange Commission’s (SEC) lack of resources to examine advisory firms makes an SRO for advisors look imminent.