Behavioral Research to Help Firm Culture: Ketchum

Stay up-to-date with the latest developments in securities law through access to both news and all statutes and regulations. Find relevant corporate filings through a searchable EDGAR database. And...

By Antoinette Gartrell

May 23 — Both regulators and the financial services industry should be using behavioral science in assessing firm culture, Financial Industry Regulatory Authority chief Richard G. Ketchum said May 23.

One aim should be to better understand “how and why honest people do dishonest things,”Ketchum said at the 2016 FINRA Annual Conference in Washington.

Research shows that people are more likely to participate in or condone unethical behavior rather than to risk standing out, he said. Registered representatives with problematic regulatory histories could be lurking in firms as “negative culture carriers,” Ketchum warned.

FINRA initiated a sweep of firms' culture in February (03 SLD, 1/6/16) (36 SLD, 2/24/16). Although the review is still in the beginning stages, FINRA examiners have noticed that firms are paying more attention to their culture and how they manage conflicts of interests, Ketchum reported. However, “there's still a lot of work to be done.”

Senator Criticisms, Bad Brokers

Sens. Elizabeth Warren (D-Mass.) and Tom Cotton (R-Ark.)—recently told FINRA it wasn't doing enough to ferret out misconduct among broker-dealers (92 SLD, 5/12/16).

The senators cited a study using FINRA BrokerCheck data concluding that roughly 7 percent of all brokers have been sanctioned for misconduct (41 SLD, 3/2/16) and that nearly half of advisers who were fired for misconduct found new jobs in the industry within one year.

Ketchum said at the time that FINRA is amping up its use of data to identify problematic brokers and is urging firms not to bring them on board.

‘Rapid Response.'

This is Ketchum's last address at FINRA's annual conference, as he is slated to retire this summer (211 SLD, 11/2/15). He said he hopes a successor will be named by June.

In the weeks leading up to his departure, Ketchum said, FINRA will be looking at arbitration task force recommendations, particularly with respect to expungement of BrokerCheck data (242 SLD, 12/17/15).

Ketchum also said that FINRA's 2015 follow-up review of firms' compensation practices suggests that they can do more to mitigate compensation-related conflicts. Firms that don't have systems that would allow them to track such conflicts should expect “significant penalties,” he said.

In 2013, FINRA said “product agnostic” compensation grids could discourage registered representatives from favoring one product over another (200 SLD, 10/16/13). It also said firms could link surveillance of registered representatives' recommendations to thresholds in a firm's compensation structure. That would help detect recommendations motivated by a desire to move up in the compensation structure , the SRO said.

Finally, Ketchum said that regulation in the next five years is going to be all about “rapid response.”“We should be in an environment where we're pulling down more information from firms and identifying risks more quickly,” he said.

To contact the reporter on this story: Antoinette Gartrell in Washington at

To contact the editor responsible for this story: Phyllis Diamond at

Request Securities & Capital Markets on Bloomberg Law