(CN) - Financial Industry Regulatory Authority CEO Richard G. Ketchum told financial firms attending FINRA's annual conference that they must place customers' interests before their firms' to regain the trust of the investing public.
"Before any complex product is offered to a retail client, your financial adviser should be able to write down on a single page why this investment is in the best interest of your client," Ketchum said.
Since the financial meltdown of 2008 Ketchum noted that FINRA and other self-regulatory bodies had upped enforcement actions against firms that led customers into buying complex products they didn't understand, or need, such as reverse indexed leverage funds.
"This means describing the circumstances under which the customer could lose money, not just those under which the customer would earn money. It also means explaining carefully the direct and imputed costs your client will incur and, where applicable, the fact that your firm or an affiliate is on the other side of the transaction," Ketchum said.
He also emphasized that FINRA has become more active in reporting and surveillance activities in the last few years, including its attempt to build a comprehensive cross-market surveillance platform that will ultimately allow creation of an instant audit trail for all securities and commodities trades in the country.
Specifically, Ketchum said FINRA will be able to use its Order Audit Trail System to conduct more granular surveillance of trading activity allowing it to determine if low compliance with trade reporting activity is intentional or the result of technical errors allowing firms to escape a formal review process.
Electronic surveillance of the markets is also helping the regulator to better fight manipulative trading activity arising from the use of algorithmic trading programs and monitor how firms assure that orders they sponsor or submit to the market meet Securities and Exchange Commission credit thresholds.
FINRA is also becoming more efficient in its routine examination process for assessing risk by using electronic data to look for areas of concern before site visits occur. "This means," Ketchum said, "our examiners can better understand the activities and risks at firms before they arrive onsite, and we can tailor our exams accordingly."