As the broker-dealer and investment advisor worlds merge, the new head of broker-dealer exams at the Securities and Exchange Commission, Kevin Goodman, said the conventional wisdom is broker-dealers want to stay out of the financial advisor space to avoid fiduciary responsibilities.

But Goodman said broker-dealers are converting to advisory businesses because they feel financial advisors have to deal with less red tape.

Goodman spoke to Financial Advisor Wednesday in Washington D.C. He became the leader of the SEC’s broker-dealer exam program in November after serving as acting since May. He supervises a staff of 300 lawyers, accountants and examiners

Goodman has a law degree from Indiana University and a bachelor’s in accounting from Purdue University. He has been with the SEC since 1992.

Here are excerpts from the interview.

FA: How has the convergence of broker-dealers and investment advisors changed the exam operation?

Goodman: The first thing is we are working with the investment advisor program much more. The second is we have engaged in a project with the IA program to better understand how firms approach the broker-dealer and investment advisor spaces differently. The less prescriptive nature of the IA regulatory structure appears to be luring broker-dealer firms to change to that business model.

 

FA: What impact will SEC Chairman Mary Jo White’s approach to enforcement have on the broker-dealer arena?

Goodman: We share the chairman’s view that addressing broken windows (small problems) promotes a stronger compliance environment. A broken window for a broker-dealer can be failing to file a required report or failing to review required forms that were filed. Minor problems might well coincide with an overall lack of detail in a firm to compliance and risk management. We want to encourage firms to better address these important areas.

 

FA: It’s becoming common for investment advisors to have an off-site mini-examination focused on risk. Are you doing this for broker-dealers or is this being considered?

Goodman: I expect with the new dealer registrants in the municipal advisor, crowd-funding portal and security-based swaps areas, we will be using these types of exams extensively.

 

FA: What new or heightened broker-dealer examination and enforcement issues are emerging with baby boomers going into retirement?

Goodman: We expect the aging population will see fraudsters trying to seize on their increasing demand for complex financial products that have innovative approaches to the generation of investment returns and minimization of risk. Some baby boomers will be susceptible to these pitches because they will need higher returns as they approach retirement.

 

FA: What changes have you made in the broker-dealer exams since you took over in May?

Goodman: The changes actually started three years ago with an extensive self-assessment process. The first year was focused on evaluation while the next two have been concentrated on implementation. One of the changes that has worked particularly well has been more frequent exchanges with corporate executives and board members. We now routinely reach out to these individuals to get better information on their view of risks at their firms as well as to share with them concerns we have identified during examinations. Another advance we have made is the creation of an electronic work book. Our examiners used to write long detailed reports. The workbooks have standardized and promoted more consistency across exams. Firms should see this increase in efficiency by getting reports on the results of field exams quicker than they used to.