Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, October 5, 2009

Ketchum on Retail Sales Practices

Excerpt from Rick Ketchum, Chairman & CEO, FINRA, Fordham University Ethics and Regulatory Conference, October 2, 2009:

Retail Sales Responses

I'd like to turn now to the retail side of our markets, where there's more direct interaction with individual investors.

 For entirely too long, this segment of U.S. markets has been marked by a struggle with regulators, as retail firms have pushed the proverbial envelope with regulators to see what products they can sell, what incentives they can offer, and what information needs to be disclosed. While they are seeking to comply with the letter of the laws, it seems that some are looking to evade the spirit of the laws.

 There is a clear need for a shift in culture at these retail firms—focused on serving customers' long-term interests, providing greater transparency about the risks and rewards of financial products, and living up to a higher standard of professional responsibility.

 There is also a clear need for a shift in regulation, and let me offer a specific example. Individual investors interface with both investment advisers and broker-dealers. These are distinct entities, but the everyday reality is, as the Rand Institute said in a study last year, that "trends in the financial service market since the early 1990s have blurred the boundaries between them."

 Indeed, most investors cannot distinguish between the investment advisory service they receive and their brokerage service. But broker-dealers are regulated one way—they operate under a standard of selling their clients "suitable" products. Investment advisers are regulated another way—they must meet a fiduciary standard that puts their clients' interests before their own.

This distinction is far from an ideal regulatory arrangement, and we agree with the Obama Administration's view that a fiduciary standard should be established for broker-dealers when they are offering investment advice. Simply put, broker-dealers should always ask whether certain products or services are in the customer's best interest.

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