FINRA CEO Criticizes DOL Fiduciary Proposal

FINRA CEO Criticizes DOL Fiduciary Proposal

The head of the Financial Industry Regulatory Authority criticized the Department of Labor’s fiduciary proposal on Wednesday, saying the industry would be better off moving forward under a  “best interest standard” for broker-dealers that would rely on disclosure and customer consent.

“Notwithstanding their good faith intentions, I believe the current Labor proposal is not the appropriate way to meet that goal,” Rick Ketchum, CEO of FINRA, told attendees of the regulator’s annual conference Wednesday.

Ketchum highlighted several areas of concern regarding the DOL’s re-proposed fiduciary rule. He called the agency’s enforcement mechanisms, which would open the door to class action lawsuits, "problematic."

“In one sweeping step, this moves enforcement of these provisions to civil class action lawsuits or arbitration where the legal focus must be on a contractual interpretation,” he said. 

The Labor Department’s rule also provided insufficient guidance on how to manage the conflicts that exist in most b/ds current business models other than moving to pure asset-based, or fee-neutral, model. Ketchum also added that he believed it was “not optimal” to apply a different legal standard to investor’s assets held in IRAs and 401(k)s than to the rest of clients’ assets.

Ketchum also said he was disappointed in much of the rhetoric around the proposal. “This strident dialogue is a disservice to a wide range of investment firms truly working to serve their clients’ interests,” Ketchum said. 

“I continue to believe today that, for both investor protection and firm cultural reasons, a best interest standard for broker-dealers—under the securities laws—is the direction we must go,” he noted. 

With that in mind, Ketchum threw his support behind the Securities and Exchange Commission as the right agency to apply that standard to broker dealers. 

He said a best interest standard should make clear that customer interests come first and that any conflicts must be understood and consented to by the customer. 

A proposal also should also require firms to put policies in place to manage conflicts of interest and address the incentives brokers may receive. 

“Broker-dealers should be required to provide customers an ADV-like document annually that provides clear, plain English descriptions of the conflicts they may have and an explanation of all product and administrative fees,” Ketchum added. 

“It is time for us to reach agreement on a best interest solution that embraces three essential tenets: active identification and management of firms’ conflicts, dramatically improved disclosure of risks associated with the product and product-related fees, firm and third party incentives, and more effective management of the compensation incentives to registered persons,” Ketchum said. 

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