Investment Advisers and Brokers Should Be Able To Explain in One Page Why an Investment Would Benefit a Retail Client, Says FINRA CEO Richard Ketchum

At the Financial Industry Regulatory Authority’s yearly conference, the SRO’s CEO, Richard Ketchum, talked about how investment advisers and brokers that sell complex instruments to retail clients should be able to write on a “single page” the reasons why the product is in the best interest of that investor. Ketchum made his comments less than a month after FINRA fined Citigroup Inc. (C), Wells Fargo & Co. (WFC), UBS AG (UBS), and Morgan Stanley (MS) $9.1 million for their alleged failure to correctly train sales employees about the features of and risks involved with leveraged and inverse exchange-traded funds.

Shepherd Smith Edwards and Kantas, LTD, LLP Founder and FINRA Arbitration lawyer William Shepherd disagrees with this ‘single page’ approach. “Despite its name, one should know that FINRA is a self-regulatory association owned and operated by securities dealers,” he said. “A one page statement as to why an investor is being sold an investment is likely designed to become a disclaimer such as the one found on a toaster or other product. This one-pager could then be used to shift the burden of suitability from the broker to the investor. Retirees who lose their savings can then be told. ‘It is your fault, not ours.’ Beware of securities self-regulators bearing gifts.”

Ketchum also talked about how reps should talk to investors about how a product will likely do in different markets and that investment losses could result. He also suggested that broker-dealers provide more training to brokers about financial products so that they can also better explain any costs involved. Acknowledging that conflicts of interests do exist, Ketchum spoke about the need for brokerage firms to self-assess regarding which is higher priority to it: the best interests of investors or that of their own employees?

Meantime, Securities Industry and Financial Markets Association general counsel and senior managing director Ira Hammerman has spoken in favor of a uniform fiduciary standard” for both investment advisers and brokers. He said it was key that new disclosures articulate in simple English the material risks, conflicts of interest, and possible rewards.

“As for standardizing the breach of fiduciary standard in the securities industry: The goal is to water-down ‘settled law’ regarding fiduciary duty,” said Stockbroker fraud attorney William Shepherd. “Other professionals, including lawyers, have lived with this duty for centuries. Since 1945, investment advisors have existed with the current legal definition of ‘fiduciary duty.’ Wall Street brokers should simply be held to the same standard.”

FINRA Annual Conference 2012

Securities Industry and Financial Markets Association

More Blog Posts
FINRA Initiatives Addressing Market Volatility Approved by the SEC, Institutional Investor Securities Blog, June 5, 2012
FINRA Will Customize Oversight to Investment Adviser Industry if Chosen as Its SRO, Stockbroker Fraud Blog, April 8, 2011

Fiduciary Standard in Securities Industry Doesn’t Need New Definition, Stockbroker Fraud Blog, November 26, 2010

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, Investment News, May 21, 2011