Broker-dealer executives are expressing some reservations about a Finra proposal that would eliminate the requirement for B-Ds to supervise the outside investment advisory activities of their reps.

The proposed changes would require a rep to provide prior written notice of an outside IA, and the B-D would be required to conduct a risk assessment of the advisory firm and either approve it, put conditions on it or disapprove it.

But B-Ds would no longer have to supervise and record transactions from the outside investment advisor, as they do now.

Finra put the proposal out for public comment in late February. The comment period runs until April 27.

At first blush, ending the supervision mandate would seem to be something brokerage firms would support. But the issue isn’t that simple.

“The problem is, if you still have a relationship with the advisor, it could open up a Wild West situation, where you don’t know what’s going on with the end investors” who have accounts at the B-D and with the outside RIA, said Wayne Bloom, chief executive of Commonwealth Financial Network. “Ultimately, if something goes wrong, you-know-what hits the fan.”

“My perception is that the legal liability and risk still exists, particularly if the independent RIA sells securities to the same client they have an advisory account with,” said Amy Webber, chief executive of Cambridge Investment Research.

“If a complaint is filed, you can be sure any intelligent attorney” will come after both the B-D and RIA firm, Webber said.

But some plaintiffs’ attorneys have a different view.

Without the clear supervisory obligation, investors will have a tough time arguing that a B-D is responsible for wrongdoing at an RIA firm owned by one of its reps, said Steve Buchwalter, an Encino, Calif.-based lawyer who represents investors.

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