Photo of Richard Ketchum by Evan Kafka for SmartMoney.

Giving a visitor a tour of his oversize but unostentatious New York City office, Richard Ketchum comes off as a mild-mannered corporate type with all the appropriate credentials and character traits. Degrees from prestigious East Coast schools? Check. (Tufts and NYU, specifically.) Conservative attire? Check. About the only time the 60-year-old securities attorney reveals a hint of passion is when the conversation turns to his beloved Boston Red Sox.

But don't be fooled: Ketchum is also passionate about the ambitious agenda he has in mind for his organization. As chief executive of the Financial Industry Regulatory Authority since 2009, Ketchum oversees 4,500-plus brokerage houses with millions of individual accounts. And now Finra, which itself is overseen by the Securities and Exchange Commission, is making a controversial play to become the sheriff for a large chunk of the country's 10,000-plus investment advisory firms. The two groups are hardly alike: Advisers typically adhere to what's called a fiduciary standard, meaning they must suggest investments that are in the best interests of their clients. Brokers, on the other hand, are required only to suggest what's "suitable" investment-wise.

Critics note that Finra is funded by the brokerage industry and question how effectively it can censure the same folks who pay its bills. They also say Finra's track record throws into question its toughness. Created four years ago from the merger of the National Association of Securities Dealers and the New York Stock Exchange's regulatory division, Finra imposed $42.5 million in fines in 2010, compared with $145.9 million issued by its predecessors in 2005. Finally, critics contend that Finra often goes after smaller and easier-to-target brokerages instead of heavier hitters. "They just never want to name a senior executive," says Peter Chepucavage, a former SEC attorney who now advises financial-services companies. For its part, Finra says it has been an effective regulator, tough on large and small firms alike, and that its annual fine amounts ebb and flow with each year's investigations. It also notes that it isn't the only industry-funded regulator. (The FDIC is another.)

In the center of all this controversy is Ketchum, a veteran regulator who spent portions of his career with the SEC, New York Stock Exchange and Nasdaq. He's had his successes at Finra most recently, an $18 million fine imposed on Charles Schwab for improper marketing of a bond fund but it's what's ahead that will likely shape how he's judged. With financial reform continuing to be a major concern among investors and politicians alike, SmartMoney sat down with Ketchum at his New York office to discuss what it will take to be Wall Street's top cop in 2011 and beyond.

SmartMoney: Many investors seem to be unaware of Finra. Why is that?

Richard Ketchum: [The name] Finra is something new, so it is a challenge for people to understand. We're the frontline regulators doing the exams [of brokerage firms] and determining whether there is a problem. Over time, I think that will be understood better. We've tried to do advertising and outreach, but in the end our money should be going to protecting investors.

SM: Can you cite specific changes you've made?

RK: We created a fraud-detection team that's sort of separate from our regular enforcement team. Matters that raise real fraud concerns are escalated to people with substantial experience working with law enforcement. We've combined that with a whistle-blower program that has generated an amazing flow of tips that have led to important cases and referrals to the SEC.

SM:Why is it better for Finra to police the brokerage firms than for the government to? Some worry that an industry-funded regulator can never be truly independent.

RK: We don't have the [public disclosure] requirements that the federal government does. So there's more interchange with the industry. But while we use the industry to get input, we are independent with respect to every decision we make.

SM: Why do you think it's important for Finra to oversee investment advisers?

RK: It could be up to 11 years [before a firm undergoes an SEC regulatory exam]. Your child could be born and almost have a bar mitzvah in that time. It's the reality of the resources of the SEC. We're sitting out there with 15 district offices and with examiners with a wide range of experience. We can deliver this service quickly and effectively.

SM: But isn't the advice-driven culture of investment advisers substantially different from the product-driven one of brokers? A lot of investment advisers wonder if Finra can understand both.

RK: We need to bring in people who are sophisticated and understand that business, and we will. But there's not one broker model. There are mom-and-pop shops, and there's also Merrill Lynch. So we understand that there isn't one-size-fits-all.

SM: Are there any investment products being sold by brokers that have you particularly concerned?

RK: In an era of extremely low interest rates, we worry about people reaching for yield with complex products without understanding that many of them have liquidity issues. It's not one product in particular, but it is the range of such products. And then, you know, you have the standard bad things you see the switching from one variable annuity to another to generate commissions and the like.

SM: You've spoken in favor of the proposed SEC switch from the suitability standard to the fiduciary standard when it comes to how brokers operate. How come?

RK: It's important to put

the client first. [Changing to] the culture of saying, "I need to document why this is in the best interest of my customer," from "I need to figure out how the product

I make the most money

on is suitable," is an important switch.

SM: But it's not necessarily one that the brokerage industry is universally embracing.

RK: If you look at large parts of the industry, their basic message is, "We're fine with the fiduciary standard. We just don't want it to be implemented wrong." And my view is that this is the chance to work with the industry and the SEC to get it right. It's basically about rethinking disclosure. We need to hit investors up front and say, "We've got conflicts" and "We receive payments" [with regard to certain financial products], rather than letting them sit with an account agreement that none of us even us regulators can really get through. When we get this done, it will be an important step to bringing back investor confidence.