FINRA Head Trashes DOL Fiduciary Proposal

WASHINGTON — The head of the Financial Industry Regulatory Authority (FINRA) said he believes that the Department of Labor’s fiduciary standard proposal “will lead many firms to close their individual retirement account business entirely or substantially constrain the clients that they will serve.”

Richard G. Ketchum, FINRA chairman and CEO, embraced the Department of Labor’s (DOL) base “best interest” concept as the appropriate core for a uniform fiduciary standard, but said the current DOL proposal doesn’t do the job it sets out to do.

Ketchum said he believes the Securities and Exchange Commission (SEC) is the appropriate agency to set the standard, but acknowledged that “there is no question that designing such a standard is challenging.”

He made his comments at the opening of the annual FINRA conference.

At the same time, Ketchum defended the work of the SEC and FINRA, noting that bad-mouthing the current oversight environment for financial products is unfair.

“Depictions of the present environment as providing ‘caveat emptor’ freedom to broker/dealers to place investors in any investment that benefits the firm financially with no disclosure of their financial incentives or the risks of the product, are simply not true,” Ketchum said in an implied criticism of the Obama administration’s claim that present rules eat into the retirement savings of Americans.

“Nor are they an accurate starting point to justify a new standard of care,” Ketchum continued.

Ketchum said he believes the DOL is not the agency that should establish the standard of care because its proposal sets up the likelihood for a double standard where oversight for individual retirement account (IRAs) and 401(k)s is different than the standard of care applied for an investor’s other financial assets.

He said a “great many” investors simply do not plan for their retirement by segregating tax-advantaged vehicles from their other investment strategies. “An effective regulatory environment would apply a consistent best interest standard across, at least, all securities investments and have the examination and enforcement mechanisms to oversee compliance with the standard,” he said.

Ketchum said the DOL proposal “was a very good faith” effort to address an important investor protection imperative and DOL has a special interest in recommendations to move assets out of 401(k)s and IRAs.

Moreover, the core features of the proposal are “aimed at exactly the right areas,” he said.

He cited the Prohibited Transaction Exemption (PTE), the demonstration that a recommendation was in the customer’s best interest, through the identification of material conflicts of interest combined with adoption of procedures to prevent such conflicts from causing unbalanced advice. He also spoke out in favor of the management of compensation practices to avoid improper incentives for conflicted advice, and implementation of effective fee and risk disclosure requirements.

However, Ketchum said, the warranty and contractual mechanism employed by the DOL to address their limited IRA enforcement jurisdiction, “appears to me to be problematic.”

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

Ketchum said he is not certain how a judicial arbiter would analyze whether a recommendation was in the best interests of the customer “without regard to the financial or other interests” of the service provider.

“I’m not sure, but I suspect, a judicial arbiter might draw a sharp line prohibiting most products with higher financial incentives no matter how sound the recommendation might be,” he said.

“Put another way, the subjective language of the PTE, coupled with a shortage of realistic guidance, may lead to few providers of these critical investor services,” Ketchum said.

InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].

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InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].