Wall Street watchdog has unfinished business with bad brokers

The head of a brokerage industry watchdog says he will leave behind at least one piece of unfinished business when he retires this year: improving access to data so that regulators can more quickly halt problem brokers, and investors can avoid them.In an interview with Reuters on Wednesday, Richard Ketchum, chairman and chief executive of the Financial Industry Regulatory Authority (FINRA), mentioned several ways data should be better collected and used by regulators and investors. He plans to present at least one of them to FINRA’s board of governors before he leaves.”There’s no doubt in my mind that the future of regulation is going to be about data analytics,” said Ketchum. “We need to have an environment where there is more access to more data for regulators so that we can react more quickly.”A top priority is getting more and better information onto FINRA’s BrokerCheck website, a free database where investors can research professional histories of brokers and firms. Ketchum said he plans to discuss this with FINRA’s board, although changes would have to be made through a rulemaking process that could take about a year.FINRA, which is funded by the industry, also wants to use data to identify the most problematic brokers and firms, Ketchum said. That could be done by looking at which ones push risky investments, or where there are high concentrations of brokers with bad behavior on their records.”It’s very important for us to know, relatively speaking, who’s active in structured products, who sold a lot a lot of Puerto Rican bonds,” he said.

“The other piece – which we’re very focused on now – is the question of how, out of the 600,000-plus registered advisers, you identify the 200 to 300 that are really dangerous from the standpoint of ‘likely to kill again’ in the short term,” he added, in reference to brokers who repeatedly bilk investors.Ketchum, 65, has been running FINRA since 2009, having spent much of his early career at the U.S. Securities and Exchange Commission and other market regulators. He announced his planned retirement last October. A replacement has not yet been named.The use of data in regulation was a recurring theme as Ketchum discussed FINRA’s future role in tracking activity across a growing number of market participants and venues.

Last year, FINRA decided against proceeding with a controversial proposal to collect customer account data that Ketchum said would allow for better analysis of trading activity, asset movements and other areas of surveillance.The industry and some lawmakers balked at the plan, saying it could infringe on customers’ privacy and could become a ripe target for hackers seeking to steal the identities of investors. Brokerages also complained that the plan would have been burdensome and costly.FINRA does not plan to revive the proposal, known as “Comprehensive Automated Risk Data System,” or CARDS, said Ketchum, who expressed some regret about its failure. But he said another planned database unveiled by the SEC on Wednesday might help plug the information gap.

The database, known as a “consolidated audit trail,” would track equity and options trades. It could help reconstruct events like the 2010 flash crash, and “more efficiently identify and investigate potential misconduct,” SEC chair Mary Jo White said in prepared remarks.FINRA is one of three organizations bidding to run the database. It might be able to use information from the audit trail for the same purposes it had planned for the CARDS database, Ketchum said.As far as BrokerCheck goes, FINRA will consider displaying the percentage of brokers with various complaints and regulatory problems at each firm, Ketchum said. FINRA is also considering making the underlying data available to the public or for licensing, he said. The regulator has long restricted access to the data because of concerns that firms would use it to mislead investors about competitors, among other reasons, Ketchum said. (Reporting by Suzanne Barlyn; Editing by Lauren Tara LaCapra and Andrew Hay)


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