(Dow Jones) Growth in the ranks of independent broker dealers is a trend that could strain one aspect of compliance in some offices: broker supervision. ?
In the large traditional brokerages, every branch will have someone in a supervisory role, and that person's job will not include sales. That's not always so in an independent firm, where offices are typically smaller and may have a supervisor who also is in sales, or may not have a supervisor at all, relying instead on another office for oversight, says former regulator Alan Wolper.
Wolper, a former director of the Financial Industry Regulatory Authority's Atlanta office who now practices securities law in Chicago, says brokerages could face greater supervision challenges as more advisers work in small offices at a long distance from a broker-dealer's home offices. ?
Thousands of advisors have gravitated to the independent model since early 2008 as the big wirehouses struggled through the market meltdown and were reshaped by mergers. Adequate supervision is a concern whenever a branch office is located far away from a home office, regardless of whether the branch is affiliated with a large wirehouse or independent broker dealer, says Wolper.
Independent broker-dealers, however, are more likely to have small one- and two-person offices in which a supervisory person is also in sales, he says. ?
Some victims in one recent fraud case involving a broker have wasted no time in alleging weak supervision. ??Rhonda Breard, a former ING Financial Partners Inc. broker in Kirkland, Wash., is accused of stealing as much as $8 million from clients and lavishing much of the money on herself. Federal prosecutors recently charged her with mail fraud and, in a lawsuit, two clients are charging that ING failed to adequately monitor Breard. ?
ING Financial Partners, an independent broker-dealer subsidiary of ING Groep NV, has been fined at least twice by state regulators for allegedly not adequately supervising brokers, according to the suit.
In 2008, for example, Illinois regulators fined the broker-dealer $110,000 and ordered it to pay $4.5 million in restitution to victims. ??ING, in a statement, said it terminated Breard's Finra registration and state securities licences when it discovered issues related to her handling of client money and notified federal and state authorities and regulators. The firm said it is reviewing the civil lawsuit and plans to defend itself. ?
Finra recently resolved a number of enforcement cases involving brokers affiliated with independent broker dealers, according to regulatory documents. Enforcement cases alleging that large brokerages fail to supervise certain brokers are also common, and Wolper notes that brokers who are intent on stealing typically find a way, regardless of the brokerage business structure.
But the distance between an independent broker-dealer's home office and small branches can make wrongdoing harder to detect, he says. ?
Walter Kapuscinski, president of Kapco Group Inc., a consultancy in Westfield, N.J., says he believes rogue brokers aren't more prevalent at independent broker-dealers than at wirehouses. Going to the trouble of setting up your own office "is very costly if all you're going to do is be dishonest," he says.
Breard is accused of directing clients to write checks for investment funds to her personally or to her wealth management business, instead of to ING. That kind of activity is a "big problem," says James Crosson of Fall River, Mass., an adviser affiliated with Investors Capital Corp., the independent broker-dealer arm of Investors Capital Holdings Ltd. "It's very hard to catch unless a client tells someone that something weird is going on." ??
Vigilant auditing can be a deterrent, however. Crosson, who was previously affiliated with LPL Financial Corp. for 18 years, says he and other independent advisers are subject to surprise audits conducted by the company's home office.
"They just pop in. But if you're doing everything O.K., there's not a problem," he says. ?
An unannounced audit of Breard's operation following customer complaints to state regulators may have supported the allegations made by federal authorities. The audit allegedly found incriminating documents in Breard's office, according to the federal complaint.
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