A white-hot regulatory agenda is bedeviling independent broker-dealers.

There's good news and bad news at independent broker-dealers these days. Sales have bounced back as much as 30% from last year's dismal showing, and that's welcome news all around. But truth be told, business has rebounded despite a crush of costly regulatory demands that has firms' compliance departments crying overload.

"Every meeting I go to, the conversation among chief executive officers isn't about how to build a better broker-dealer, the direction of the markets or how to create better products," says Art Grant, CEO of Cadaret Grant, in Syracuse, N.Y. "It's about compliance and what the next regulatory shoe to drop will be."

Grant echoes the sentiments of a number of brokerage executives and compliance experts, who say that firms are being required to dig out from under an unprecedented amount of new regulation, much of which is fallout from sins committed by shops often outside the independent channel.

Firms and their compliance departments are being asked to turn on a dime, do massive data collection and analysis and create new systems, often with little notice. It may be to grapple with mutual fund trading scandals, new point-of-sale disclosure requirements or, in one of the National Association of Securities Dealers (NASD) latest promulgations, a regulation that asks firms to justify the superiority of their fee-based accounts in terms of services and customers' costs over commission-based offerings.

"We're under siege, and I believe there will be unintended consequences for the industry and American society because there is simply not enough time to think through the ramifications of these regulatory demands," says Tony Batman, chairman of the Atlanta-based Financial Services Institute (FSI). The institute was founded in January to represent the interests of independent broker-dealers. One such unintended result "may be that the industry grinds to a halt because we're creating an environment where every advisor is out of compliance and violating rules at all times."

Mary Schapiro, the NASD's president of regulatory policy and oversight, told compliance officials at the Securities Industry Association' (SIA) March Compliance and Legal Conference in Phoenix that the self-regulator has issued some 95 different regulatory initiatives in the last two years alone.

Twenty of these 95 regulations impact independent broker-dealers on a large scale, the FSI estimates. The overall cost to firms is immeasurable, says Batman, whose association represents 88 firms and 100,000 reps (out of the industry's approximately 660,000 registered reps).

But one figure is sending shockwaves through the industry. The SIA has estimated that it will cost firms some $17 billion in the first year to meet the new point-of-sale disclosure requirements mandated by the Securities and Exchange Commission (SEC) earlier this year. "That's more than the industry will earn in a year," maintains Batman.

Schapiro says that the pace and aggression of new regulation is unlikely to abate. She told compliance officers point blank at the Phoenix meeting: "I must admit to a concern that, deep down, many on the business side cling to a belief that 'this too shall pass,' that at some point we will return to the normalcy of lessened regulatory scrutiny and demand. Such thinking, if it does exist, misperceives the lasting effect of recent events. A tipping point has occurred and this industry will, for the foreseeable future, face increased obligations and heightened scrutiny of regulators. There is no reason to pretend that this change is not permanent, and dangerous consequences lie ahead if we fail to recognize this and act accordingly. Yes, we have burdened your regulatory load significantly over the years, and inevitably more is to come."

Both the FSI and SIA have asked regulators at the SEC and NASD for a formal moratorium on new rules. "At this point, we're requesting it so we can be more thorough in analyzing the application, implementation and consequences of any new regulation," says Batman.