Compounding the expected late-stage rush is that the new filings have to be done by July 21, squeezing them into an eight-month time span, and that the number of new firms in the under-$100-million-AUM category continues to grow faster than other groups, says one expert.
Some people in the industry question whether state securities regulators in cash-strapped states will have the resources to do the job. However, the North American Securities Administrators Association, a membership group of state securities regulators, says some states are expanding the number of examiners on staff, and others are creating procedures to share resources to handle the expected rising workload.
Report Examines B-D Regulatory Hot Spots
As regulators sort through the regulatory mandates thrown on their laps by Congress courtesy of the Dodd-Frank Wall Street Reform and Consumer Protection Act that became law this summer, the financial advisory industry is waiting to see how it all shakes out.
A recent study commissioned by Albridge Solutions, a wealth management services and technology provider and a Pershing LLC affiliate, talked to broker-dealers and regulators alike to uncover compliance gaps and document best practices relating to broker-dealer compliance. It also revealed the regulatory hot spots for broker-dealers that regulators are focusing on.
Among them: how broker-dealers will handle client disclosures and education if the SEC mandates a uniform fiduciary standard of care for personal financial advice dispensed at the point-of-sale. Such a uniform compliance standard would embrace the notion that all investors get the same standard of care whether an investment is made through an SEC-registered investment advisor or a FINRA-regulated broker-dealer. Both SEC Chairwoman Mary Schapiro and FINRA CEO Rick Ketchum have publicly called for some type of uniform standard across the industry.
Investment advisors fear that would weaken the current fiduciary standard; broker-dealers worry it would create burdensome compliance costs. "I don't think it'll be a doomsday scenario [for broker-dealers]," says Marshall Levin, a partner at Beacon Strategies LLC, a consulting firm that conducted the Albridge study. "But it will be a pretty significant change."
Levin says broker-dealer compliance standards will likely mimic what RIAs do now, such as having the equivalent of an ADV where brokers would disclose their remuneration for different activities they do.
One of the study's conclusions is that broker-dealers will have to prove they communicated the pros, cons and costs for every recommendation they make, and they'll have to provide a reasonable belief that the investor understood the recommendation.
Furthermore, any conflicts of interest must be disclosed in plain English to convince regulators that the client had sufficient information to make an informed decision.
Chip Kispert, managing partner at Beacon Strategies, says the survey found a significant chasm between broker-dealers' ability to oversee their investment professionals and the likely regulatory demands coming down the pike. He notes one of the problems he finds is that only 30% of firms use automated compliance surveillance tools.