Industry observers are welcoming an idea floated by Finra to eliminate the requirement for B-Ds to oversee the independent RIA business activities of their hybrid reps.

If Finra follows through on the idea, it would be a huge relief for B-Ds who have been challenged to undertake this type of supervision.

Buried in an update to its December board meeting, Finra said it had directed its staff to publish a regulatory notice seeking comment on a proposal that would “eliminate supervisory obligations for non-broker-dealer outside activities, including investment advisory activities at an unaffiliated third-party adviser.”

The action was prompted by Finra’s ongoing retrospective review of rules, the notice said. Liabilities associated with "failure to supervise" regulatory actions and potential lawsuits associated with investment vehicles that B-Ds never approved and, in many cases, were totally unaware of has long been a major source of sleepness nights for brokerage executives. The practice is known as "selling away."

A Finra spokesperson could not offer further details on the upcoming regulatory notice, or its timing.

Under its rules for private securities transactions, Finra requires that B-Ds record the transactions and supervise the conduct of outside RIAs run by their brokers.

That Finra is now thinking of dumping that provision is “good news for firms and advisors,” said Joel Beck of The Beck Law Firm in Lawrenceville, Ga., and a former Finra attorney. “It makes perfect sense to me to get rid of that layer of regulation. ... RIAs are held to a fiduciary standard, and they’re regulated, so in my opinion we don’t need B-Ds to supervise that.”

Elimination of the requirement would be “fantastic” for B-Ds, agreed Alan Wolper, a partner at Ulmer & Berne LLP in Chicago. Wolper, a former Finra district director, thinks the oversight requirements are confusing. “It’s never exactly clear what trades you’re responsible for supervising,” he said.

The requirement has “always been a point of consternation,”  Wolper added. “It’s an area that’s been really unclear for 25 years [and] it affects a lot of people.”

But the big nightmare for broker-dealers has always been the potential liabilities arising from a rogue broker who sold unregistered private securities, unbeknownst to the B-D, that proved worthless. Almost always, the rogue broker has exhausted or squandered the clients' money, so lawyers for the victims inevitably look for deep pockets to compensate their clients. That deep pocket inevitably turns out to be the B-D.

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