(Dow Jones) Brokerages may end up hunting for new custodians if a proposal intended to speed up asset verification is approved.

The proposal by the Financial Industry Regulatory Authority would give it authority to stop brokerages from using custodians that aren't registered with the regulator and drag their feet in response to requests for written verification of assets.

Finra's proposal may signal a larger problem with efforts by regulators to verify the existence of customer assets held with third-party custodians. Financial institutions typically don't have a legal obligation to provide such information if they aren't registered with the regulator making the request, lawyers say. That could be slowing down a process that has become standard following the Bernard Madoff scandal.

"Because of technology, someone can make account statements look real," says Grace Vogel, Finra's executive vice president of member regulation. Finra is mainly concerned about potential investor fraud, Vogel said. "Obviously, if the assets don't exist at the custodian, a fraud has been uncovered."

The Finra proposal aims to encourage that brokerages enter agreements with non-registered custodians requiring them to comply with the regulator's staff requests, said Vogel. It stops short of requiring such contracts, but the arrangement could make it easier for brokerages to take legal action against custodians that don't promptly respond to Finra's requests.

Finra's proposal doesn't specify the types of assets it may seek to verify. The process, however, applies to a broad range of holdings, including equities, Treasury bonds and cash, Vogel said. Finra also is verifying firms' own holdings to ensure they're compliant with Finra's net capital requirements, she said.

The regulator and Depository Trust & Clearing Corporation, or DTCC, recently established a program that will give Finra staff routine access to DTCC records for asset verification and other purposes, such as examinations. A DTCC subsidiary, the Depository Trust Company, is the largest securities depository in the world, according to a DTCC spokesman. Finra doesn't anticipate delays in verifying assets with DTCC, which isn't Finra-registered, because of the new procedures, said Vogel.

That will be critical if the proposal is approved because finding alternative custodians to DTCC would be virtually impossible, say lawyers.

The Securities and Exchange Commission has run into delays when trying to verify assets with custodians, such as banks, that aren't SEC-registered, said Norm Champ, associate regional director for examinations in the agency's New York regional office, during a recent interview.

Transferring assets between custodians can take about three months, said Bruce MacKenzie, a securities attorney in Minneapolis who represents brokerages. MacKenzie calls the Finra proposal an overreaction. "Is there rampant fraud among our banking and custodial institutions that are non-Finra members that requires such a prompt-response regulation?" he asked.

Other reactions are more favorable. "This is a very good way of protecting the public," said Jervis Hough, founder of Taurus Compliance Consulting, LLC in Aventura, Fla. Some custodians that aren't Finra-regulated may try to avoid its staff to protect their business relationship with a brokerage, he said. Requiring certain firms to find new custodians can increase transparency, he said. "There are plenty of custodians who want that business, and who will verify the assets on time."

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