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NYSE Official Focuses on Independence of Exchange Regulatory Arm

In recent remarks at two seminars, NYSE Chief Regulatory Officer Richard Ketchum emphasized the independence and transparency of NYSE Regulation in the context of broadly examining the future of self-regulation. Ketchum, a former head of the SEC's Division of Market Regulation, said that the NYSE governance changes approved by the SEC late last year make the chief regulatory officer a direct report to the exchange's board through its regulatory oversight committee, which provides accountability for the NYSE's regulatory program. The compensation and ultimate success of NYSE Regulation relates solely to its performance as a regulator, and not to the success of the market, Ketchum explained. His remarks were made at the A.A. Sommer Lecture at Fordham Law School and the PLI Securities Regulation Institute.

Ketchum called for revitalizing what he referred to as the self-regulatory compact involving the SROs, the industry and investors. The first step on this road is to build a culture of compliance in the securities industry, he said, since self-regulation must stand for more than just a strong enforcement program. Investors will benefit most if compliance is embraced, not out of fear, but out of sound business practices.

Ketchum asked firms to recognize that their legal and compliance staffs are their lifelines to building a compliance foundation. In addition, access to senior management must be regular and unconditional. The conversations have to go beyond a discussion of current events to a genuine analysis of compliance risks across the business, according to Ketchum. Firms must get better at assessing their compliance risks, he continued, and they must, in particular, capitalize on the self-assessments required by the Sarbanes-Oxley Act.

While recognizing that a critical analysis of compliance shortcomings is not intuitive to broker-dealers, Ketchum stressed the importance of firm-wide reflective analysis of regulatory risks. Similarly, firms must be alert to products that evolve from an institutional to a retail focus. He suggested best practices focusing on a separate committee review of any decisions to sell products to retail investors, with a periodic revisiting of how those products are being used and sold.

Ketchum also sees a need to push hard at technology risks, including flaws in regulatory reporting, changes in email supervision demands and capacity issues. NYSE Regulation intends to emphasize internal control reviews in the coming years. Ketchum cited recently adopted rules governing supervision and internal controls under which firms must maintain written policies, procedures and controls over the transmission of customer funds and services.

Ketchum endorsed rule-based guidance as the preferred regulatory path. For example, with regard to non-discretionary fee-based accounts, NYSE Regulation has a rule pending with the SEC that would require upfront disclosure of the characteristics of the account and, annually thereafter, the advantages and disadvantages of that type of account. Firms would also be required to describe the services provided and fees charged and to make a determination, prior to the opening of the account, that the account is appropriate for each customer.

Rules that become effective December 17 will require the implementation of written policies and procedures to independently supervise sales managers and other supervisory personnel who service customer accounts. The rules apply to branch office managers and regional sales managers and should encompass activities such as new account approval, ongoing monitoring and review of activity for suitability, and unauthorized transactions. The intent of the rule is to ensure that persons who have no personal interest in such activity monitor all customer activity for compliance.

In addition to rulemaking, effective self-regulation must also stand for stern discipline with respect to serious law violations, Ketchum emphasized. The perception that regulatory fines for non-compliance are an acceptable cost of doing business must be eliminated, he declared. Self-regulation is not about low penalties, he said. It is about the wisdom of being able to discern the difference between a technical and a serious violation, and between a firm that has violated a rule despite a serious commitment to compliance and a firm that is a consistent recidivist.