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Feb 19, 2009 4:30 pm

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An irreverent Wall Street Blog
by Bill Singer Subscribe to RSS Feed: Blog Home | Past Entries Richard Ketchum and FINRA: Time to Answer for his Past? Written: February 19, 2009

By Bill Singer


In response to the calls from my readers, I am adding this Pre-script (if it were a post-script it would be at the end) to remind you that I sort of predicted the Ketchum nomination on January 29, 2009.  Read this

According the the Wall Street Journal, The Financial Industry Regulatory Authority's (FINRA)  21-member Board plans to name Richard Ketchum as its Chief Executive Officer.  

Richard Ketchum was Chief Executive Officer of NYSE Regulation, Inc., since 2006 and had served as the first Chief Regulatory Officer of the New York Stock Exchange since March 8, 2004.  From June 2003 to March 2004, Mr. Ketchum was General Counsel of the Corporate and Investment Bank of Citigroup Inc., and a member of the unit’s planning group, Business Practices Committee and Risk Management Committee.  Previously, he spent 12 years at the NASD and Nasdaq Stock Market, Inc. He served as President of Nasdaq for three years and as President of the NASD for seven years.  Prior to working at the NASD and Nasdaq, Mr. Ketchum was at the Securities and Exchange Commission (SEC) for 14 years, eight of those years as Director of the Division of Market Regulation. 

Having been inundated with Press queries about the choice, let me be direct in my reply.

These are dire times for Wall Street as an industry and for the investing public.  Much of the trouble we now find ourselves in was caused by what I have long viewed as inept and corrupt regulation.  Clearly, my once maverick views have now come into the mainstream.  

Richard Ketchum is indeed a veteran regulator, and he is certainly not an individual who I consider corrupt.  To the contrary, I believe that he has been sincere in regulating as he saw best.  Unfortunately, it is his "vision" for regulation that forces me to pause. FINRA proposes to hand its helm over to a former Citigroup insider -- these days, not exactly a credential to inspire confidence (although Ketchum's tenure there was notably short).  Moreover, Ketchum is yet another one of those former SEC-former NASD-former NASDAQ types who had many, many opportunities to reform our failed regulatory system and either chose to perpetuate it or simply lacked the ideas and will to accomplish the task. I do not believe that you can undertake the necessary overhaul of Wall Street's failed regulatory system by merely recycling old faces and ideas. Regrettably, that is how I see Ketchum.

As reported in the Los Angeles Time: TRADING: Officials Defend System's Fairness (October 20, 1994, Page A20):

[T]he Times, meanwhile, has learned that at the same time they were deriding the professors' report, top NASD officials quietly had begun moving to address a problem whose existence they publicly denied.

On May 24--just a day before he publicly blasted the professors report as "slanderous"-- Ketchum addressed a closed-door meeting of major Nasdaq market makers sponsored by the Securities Traders Assn., at the headquarters of Bear, Stearns & Co. Inc in New York.

Ketchum has since confirmed that he told the market makers that the spreads on some stocks were too wide--and asked for voluntary action to narrow them.  Otherwise, he said, the NASD might be forced to crack down.

Let me offer a quick refresher about the professors' slanderous report:

In the summer of 1994, shortly after the publication of an economic study by Professors William Christie of Vanderbilt University and Paul Schultz of Ohio State University about alleged price fixing on the Nasdaq market, the United States Department of Justice's Antitrust Division began an investigation. On July 16, 1996, then U.S. Attorney General Janet Reno announced an historic price-fixing case against 24 NASDAQ market makers. 

"As a result of this conduct American investors had to pay more to buy and sell stocks than they would have if there had been true competition," said Attorney General Janet Reno. "We have found substantial evidence of coercion and other misconduct in this industry. By providing for the random monitoring of traders' telephone calls, we expect to deter future price fixing on Nasdaq." 

Shortly thereafter, in August 1996, the U.S. Securities and Exchange Commission formally censured the NASD in an historic rebuke for its failure to properly regulate.  Then SEC Chair Arthur Levitt asked, ''Where was the N.A.S.D., the cop on the Nasdaq beat? The N.A.S.D. was not blind to these practices in the marketplace,'' he said. ''It simply looked the other way.'' In November 1998, some three dozen of NASDAQ's largest market makers were forced to settle a civil class action alleging price-fixing for over $1 billion.

Professors Christie and Schultz revolutionized the NASDAQ market by shedding light on the unseemly, anti-competitive practices of its major market makers.  And the anti-consumer efforts of those market makers was countenanced by the NASD, as has been amply documented by the SEC in its 21(a) Report. Please refresh your memory as to the sordid details involving the NASD self-regulator at  And let me call your attention to one particularly damning section:

The NASD's failure to investigate and pursue aggressively clear indications of possible violations seriously undermined its ability to ensure compliance with the NASD's own rules as well as the requirements of the federal securities laws. As discussed below, the consequences for the Nasdaq market of this failure were exacerbated by the undue influence exercised by Nasdaq market makers over various aspects of the NASD's operations and regulatory affairs. This influence made vigorous enforcement by the NASD even more essential to the fair operation of the Nasdaq market.

See Pages 3-4 of 21(a) Report

There seems little question in my mind that Ketchum was a senior regulator at NASD during the time when the SEC accused the self-regulator of failing to investigate, failing to aggressively pursue "clear indications" of violations, failing to deter the undue influence of influential member firms. Further, according to the Times' article, just a day before he publicly blasted the professors report as "slanderous"-- Ketchum addressed a closed-door meeting of major Nasdaq market makers sponsored by the Securities Traders Assn., at the headquarters of Bear, Stearns & Co. Inc in New York.

I do not recall Ketchum ever apologizing for labeling the professors' report as slanderous.  That is troubling.  Moreover, while telling the public and industry small fry one thing, he was apparently resorting to what far too many industry regulators have done for far too long -- meeting with the vested interests and power brokers behind closed doors. 

Finally, and perhaps most disheartening, that 15-year old Times story gives us yet another glimpse into the darkened heart of our nation's regulatory system.  Ketchum has since confirmed that he told the market makers that the spreads on some stocks were too wide--and asked for voluntary action to narrow them.  Otherwise, he said, the NASD might be forced to crack down.

Is that the aggressive, new style of self-regulation that FINRA seeks?  A regulator finally uncovers a serious problem and simply asks for us all to get along -- will you do me a personal favor and voluntarily comply with the law?  How lovely that regulation is little more than a threat to "crack down."  Does FINRA's Board really think that this is the tough policing that the investor public and indie/regional broker-dealer community desires?

Once again, I find myself disheartened by self regulation and its cronies and failed reforms.  Richard Ketchum once sought to resolve a major anti-consumer fraud behind closed-doors at Bear Stearns and through threats against academics. That needs to be addressed before he is confirmed. FINRA seems to think that its future is best served through hiring a veteran regulator whose credentials may once have been sterling for such a job, but whose past actions raise far too many questions.

Was this the best candidate that the Board could find? Who else did they interview? Who did the interviewing? Behind what other closed-doors were such meetings held?

I'm sorry--but if this is the best person for the job and this is the best that FINRA's Board can offer, then it's simply time to turn off the lights and lock the doors as we all leave FINRA behind.  I will be the first person to offer to meet with Ketchum, and with no preconditions.  I will be the first person to offer to work with him on serious reform of FINRA.  However, this selection and the selection process are simply not acceptable to the FINRA community or to the investing public.