Richard Ketchum Keynote from the Compliance Week Conference


My notes, live, from the Richard Ketchum keynote at the Compliance Week Conference. Mr. Ketchum is the newly named chairman and CEO of FINRA.

It is a terribly important time as financial markets are in the process of transformation. It was two years ago when the first signs of the credit crisis appeared. The silver lining is that the crisis offers an opportunity to reform the financial markets.

Mr. Ketchum moved onto the idea of a systemic risk regulator. He thinks some regulator will be in place. As to whether it is a single entity or a council of regulators, Mr. Ketchum stated that some of the risk and problems came from loosely regulated entities and in transactions that were not transparent. He thinks value of a systemic regulator is good but thinks we need to focus on the function of this new regulator. He wants to avoid duplication and also to avoid things falling through the cracks.

He looked to the Federal Reserve as regulator that had a broad mandate to see big problems. They were less able to focus on the detail of regular reporting and maintenance. He thinks the new systemic regulator should not replace existing regulators. He also did not seem to like the idea of breaking up the SEC. They are very involved in many aspects of the markets and have a breadth of experience and controls in place.

He moved on to the issue of short selling in the marketplace.  There are several proposals being reviewed as a result of the fierce short-selling that happened in September and October. He thinks the selling that happened during that time was most long sellers, not short sellers. Short selling may have caused the disappearance of any buyers. He seems to be leaning toward a circuit-breaker when a company’s stock is under pressure. He did not seem to give a straight answer.

He moved onto the subject of derivatives. The market provides a great deal of leverage, has a great deal of inefficiency and is very transparent. The derivatives markets also react quicker than the equity markets. He thinks the key is transparency so we can see the movement and the risk. The opacity of the derivatives markets contributed to the plunge in the investment markets.

He moved onto the lessons we could learn from volatile markets. He thinks we need to revisit diligence and reduce our reliance on ratings to get a better understanding of the security (in particular asset-backed securities). You need to keep the creators of the securities away from the ratings of the securities.

He thinks compliance needs to be infused into more functions. He thinks compliance officers can look at the risks and not rely on assumptions. You need to make sure that decisions that benefit the company do not come at the expense of the company’s clients or customers.

Nobody feels good about the implosion of the financial markets. FINRA is re-evaluating their internal processes to see what they could do better. He pointed out the new FINRA Whistleblower hotline. FINRA is looking at ways to make sure things do not fall through the cracks.

He thinks the biggest gap is the different regimes between broker-dealers and investment advisers. He thinks investment advisers need to be more regulated and more closely examined. he does recognize that there are different risks and different concerns. You can’t throw the same rulebook at them, but he thinks you need to keep a closer eye on them.

The keystone moving forward is winning back the trust of investors. Without trust, the markets are paralyzed. Fraud impoverishes the few; distrust impoverishes many.

In the chat session, Matt put the Madoff scenario in front of Mr. Ketchum. He thinks that is the great example of having different regimes for broker-dealers and investment advisers. FINRA could not look over the wall at the advisory side of the business.

There is no definition of a systemic risk. Mr. Ketchum thinks it is one that can impact the financial marketplace as a whole and not just an individual institution.

(These notes are taken live, so I apologize if I left out anything or misquoted someone. Please forgive any typos or grammatical errors.)

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