“We had our best year ever last year,” said Robert Keenan, chief executive at St. Bernard Financial Services in Russellville, Ark., which serves 90 independent contractor reps. But the “costs for compliance go up every year.”
Although Finra is considering some relief for B-Ds from outdated rules, any relief will likely be limited given the size of the rule book and inevitable political backlash against moves to lessen regulation of Wall Street. Besides, Finra isn’t the only regulator firms have to deal with.
State regulators, for one, have gotten tougher, observers say. Massachusetts and New York are mentioned as particularly tough jurisdictions. “They’ve gotten too oppressive,” said Jon Henschen, who recruits independent reps.
“A lot of these state securities departments have decided Finra isn’t doing a good job,” Keenan adds. “Now I get a four-page [inquiry] letter from states when trying to register a person.”
And the requirement under the Dodd-Frank Act for financial statements to be OK’d by auditors certified by the Public Company Accounting Oversight Board has stuck in the craw of small firms ever since the rule went into effect in 2013. The requirement raised costs, forced some firms to find new auditors, and at least in the view of small B-Ds, shouldn’t apply to brokerage firms that don’t custody customer assets.
Small firms continue to work on a grass-roots effort to get an exemption from the PCAOB audit. All told, those regulatory burdens get the most blame for the long-term erosion in broker-dealer numbers.
True, new B-Ds are being formed, but at only about half the rate as firms throwing in the towel, Keenan said. “Among new [B-Ds], there are very few traditional firms with a clearing agreement,” Keenan said. Most are doing private placements or other types of business for which they need a limited-purpose broker-dealer, he says.
“We’re not seeing [new] small firms wanting to do a general securities business,” agrees Michael Brown, president of B/D Solutions Consulting, a compliance consultant in Atlanta. “That’s just a tough, tough business.”
What Finra is seeing are start-ups involved in blockchain-related deals and other private offerings. These specialty firms that want to be legitimate “are putting [deals] through B-Ds, just like any other offering, because they don’t want to be the first one the SEC clamps down on,” Brown says.
Finra chief Robert Cook seems to be attentive to the fact that membership is going down, Keenan said, and is undertaking a retrospective review of a number of existing regulations as part of an effort to ease the regulatory burden. “It’s a good start, but there still is a lot that needs to happen,” Keenan says.