Marc Butler, managing director at Pershing, says it's hard to pinpoint how much compliance upgrades will cost. "The best we can do to help firms is to give them recommendations for the next step," he says.

According to the study, "Broker-Dealer Sales Practices Oversight: Secrets of Their Success," other areas broker-dealers will need to be aware of include sensitivity to fraud (that applies to advisors across all channels), increased protection for elderly investors, and the expectation that FINRA will propose a rule to give investors the right to dispute claims against broker-dealer firms and individual advisors through an all-public arbitration panel.

Regarding a possible uniform standard of care, Levin says the SEC is turning to FINRA to set the parameters for a single standard because the former has too many regulatory matters on its plate already. And that begs the question whether FINRA could eventually become the self-regulatory organization for RIAs, an issue that's anathema to many RIAs.

"The issue will be a political hot potato," Levin says.

Mock Audits Raise Disclosure Concerns
(Dow Jones) Mock compliance audits are a helpful tool, but some advisors worry whether conducting one could mean disclosing troublesome findings to regulators. The process, often conducted by professionals who are former regulators, aims to simulate an examination by the SEC and FINRA. It gives firms an opportunity to detect and fix compliance problems before the real regulators catch them.

Some advisors are concerned about their legal obligation to inform regulators of some of the problems that outside consultants detect, such as a firm principal who isn't conducting adequate suitability reviews.

Firms aren't required to report findings to regulators, said Amy Lynch, president of FrontLine Compliance LLC in Leesburg, Va. But they still may want to report certain material problems, such as a compliance lapse behind an error that significantly affected a customer account and, by extension, the firm. Regulators may learn of the problems anyway if they later conduct their own examination, she said.

In any event, firms should be prepared to speak up about compliance breaches and how they fixed them if regulators later decide to conduct their own examinations, said Lynch.

Many larger firms and sophisticated adviors try to protect the confidentiality of their information by retaining a lawyer who then contracts for mock audit services, said Barry Schwartz, a partner with ACA Compliance Group in Boca Raton, Fla. The lawyer can assert that the information is protected under attorney-client privilege.

Copyright © 2010 Dow Jones & Co. Inc.

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