"I'm not a big believer in beating a head against the wall.  We'll focus on things we can impact." - Rick Ketchum.

[ by Howard Haykin ]

FINRA Chairman and CEO Richard 'Rick' Ketchum announced that his regulatory organization is discontinuing its winding and long-winded campaign to expand its regulatory reach to some 11,000 registered investment advisers.  A frequent visitor to Capital Hill, Mr. Ketchum took every opportunity to promote the organization and efficiency of FINRA's army of examiners, who would conduct an on-site visit at every registered investment adviser - even those who can't recall the last time a regulator visit their offices. 

The decision also means that FINRA is calling in its lobbyists, who have been operating on a $1 million a year budget - nearly $5 million since 2008 - and the FINRA will have to tear down its encampment erected at the foot of Capital Hill.  FINRA's 24/7 presence was a central theme of its campaign.

Before departing, Chairman Rick issued a warning that FINRA's departure - at least for the present time - leaves a regulatory hole that could be exploited by those intending to commit fraud.

Unbowed Electioneering Fails to Sway Congressional Leaders.   Despite taking every opportunity to promote his regulatory organization to members of Congress, Mr. Ketchum on Wednesday finally admitted that there was no sign or indication that lawmakers in Washington can be convinced to support a change in the way advisers are regulated anytime soon.  Worst of all is the House of Representatives Financial Services Committee, which will need a lot of time before it can revisit the topic - given the leadership changes arising from the 2012 elections. 

Having spent nearly $5 million on lobbying since 2008 - according to the Center for Responsive Politics, a D,C,-based research firm - Mr. Ketchum was upbeat firmly in control of his emotions.  Besides accepting the universal mantra of Wall Street traders - "to cut your losses and live to trade for another day" - Mr. Ketchum simply expressed his chosen strategy:  "I'm not a big believer in beating a head against the wall.  We'll focus on things we can impact."

Currently, registered investment advisers are regulated by ...  the SEC, which lacks resources and can only get around to examining each adviser's books about once every 11 years on average.  A 2009 report by a special committee commissioned by FINRA reported that the SEC's lack of authority over investment advisers contributed to its failure to uncover Bernard Madoff's multi-billion-dollar fraud. FINRA's authority extended to the brokerage arm of Madoff's business while the SEC oversaw Madoff's investment advisory business. They both missed numerous red flags.

There is wide agreement that investment advisers need to be examined more often than they are now. But there's little agreement about how to get there. And now that key Congressional committees that could extend FINRA's role are led by lawmakers who have other priorities - such as housing policy - the issue is on the back burner.  A major reason that FINRA could not get its foot in the door in Washington is that FINRA has been unable to get unequivocal support from the SEC for its stance. Ketchum said that if it could get clear and enthusiastic backing from the SEC, then FINRA would become more aggressive about the question again.

Meanwhile, investors remain vulnerable to advisers who are not examined regularly, Mr. Ketchum said.  FINRA examines the 4,275 firms it currently regulates once every two years on average.  A lack of manpower and financial resources at the SEC are at the root of the problem, Ketchum said.  Starting in 2012, the SEC had the added burdens of examining newly registered hedge fund managers, and having to draft rules mandated by the Dodd-Frank Reform Act.

For further details, go to [Reuters, 2/7/13].