FINRA Chairman and CEO Speech at SIFMA Complex Products Forum (with Lofchie Comment: This is an Important Speech)

FINRA Chairman and CEO, Richard G. Ketchum, delivered a speech at the SIFMA Complex Products Forum addressing what he believes is the growing importance of the wide array of complex products in the retail market, and the crucial need to supervise at every stage of the distribution process. Chairman Ketchum discusses the lack of "merit" regulation (i.e., denying retail investors the opportunity to invest in risky or complicated products) in the U.S. as we instead largely rely on disclosure requirements. In the speech, Chairman Ketchum states that some forms of merit-based product approval may become inevitable if regulators cannot demonstrate their ability to control sales practice abuses relating to complex products through appropriate supervisory controls and oversight.

In addition, Chairman Ketchum gives examples of the term "complex product", and he discusses a number of the enforcement actions that the SEC has brought.

Lofchie Comment: This is an important speech. Here is the punch line: "Neither FINRA nor the SEC engages in "merit" regulation of complex products. But we will do whatever is necessary to ensure that our members supervise the sale of complex products to the retail public." In short, FINRA Chairman Ketchum proposes to materially expand regulation under the U.S. securities laws from the historic focus on adequate disclosure, along with regulation of "suitability" of recommendations, to a form of regulation that would determine what products may be sold to what investors. On a somewhat more mundane level, Chairman Ketchum provides some descriptions of his view as to the required supervisory procedures within a firm that sells complex products. But the more difficult supervisory issue that he raises is as to the relationship between wholesalers and retail firms. In this regard, Chairman Ketchum says, "It would be foolish for any firm, including yours, to distribute complex products to retail investors without ensuring that products are vetted, reps are trained and supervised, and risks are disclosed in a way that the average investor can understand." Many complex products are distributed by broker-dealer wholesalers. In reviewing the activities of these wholesalers, FINRA is focusing on their level of understanding of complex products, how they are compensated for promoting them to retail broker-dealers, what they advertise about the products, and how they inform the distributing dealer about the complexities and risks of these products." From this paragraph, it is not entirely clear what obligation he conceives that wholesalers would take as to the activities of retailers. Chairman Ketchum also raises issues as to registered representatives (whom he calls financial advisers): do they understand the products that they sell? Are they (im)properly motivated by the firm's compensation scheme?

View speech in full here (links externally to FINRA website).