The "Current Disciplinary Actions" file that FINRA posts on its Web site reads like a police blotter section of a community newspaper. The juicy details are all there: which firms and individuals have been sanctioned, the nature of their misdeeds and the extent of the penalties handed out - from fines and suspensions to expulsion.
Advisors and reps seeking insight into the areas where financial regulators are focusing their investigative and enforcement energies need look no further than this monthly log of true-to-life cautionary tales. It names names. FINRA needed 28 pages for those names in its January 2008 posting alone.
However, during an era in which regulation is perceived to be growing stricter and compliance requirements for advisors more onerous, investor complaints and disciplinary actions are dwindling. Indeed, FINRA reported a huge one-year drop in investor complaints it received, from 5,671 in 2006 to 4,552 last year. It's part of a broader trend in which the number of investor complaints and new disciplinary actions decreased from 2003 to 2007 -- during a time when the number of registered reps and branch offices under FINRA purview increased substantially.
Perhaps it signals a kindler, gentler approach by financial regulators. But with new rules on the books and others in the pipeline, regulatory compliance remains a major consideration for reps, advisors and the firms with which they are associated. Their main challenge is staying on the right side of a line that keeps moving as new rules are implemented, revised and reinterpreted.
"In this business," says Cliff Oberlin, CEO of NRP Financial, an independent broker/dealer based in Bryan, Ohio, "the rules are not always black and white. Sometimes they're gray. But suddenly, with one enforcement action, a gray area can turn black or white."
For that reason, Oberlin urges advisor-reps to regularly read FINRA's log of disciplinary actions. "It's an eye-opener for them because they can see how rules are being interpreted and they see firms and reps they know. When they read it, it's like, 'Oh, my gosh.'"
Still, says Ron Duska, director of the Center for Ethics in Financial Services at the American College, staying "clean" is a relatively straightforward exercise, though it likely entails plenty of paperwork.
"If you're fairly straight with your clients, if you disclose and document everything you do, you tend to stay out of trouble. Most of the [compliance-related] griping I hear has to do with filling out forms -- paperwork stuff. And I tend to agree that stuff can be onerous."
An underlying commitment to ethical practices is invaluable in compliance efforts, he says, "If you're just aiming to be compliant, you'll be less successful than you would be if you're aiming to be ethical. If you're ethical, you probably are going to be in compliance, too."
Even for advisors who stick to the ethical high road, it doesn't hurt to know where potential compliance landmines lurk. Here's a look at several areas where it's suggested they tread most gingerly:
Any products with which suitability is a common issue -- Besides pending implementation of new variable annuity transaction guidelines for broker/dealers and reps (see the sidebar), regulators are also paying close attention to financial professionals and firms involved in instruments such as life settlements. Because it's an increasingly frequent maneuver whose high commissions may invite questionable practices, "life settlement has been a red flag for us for awhile," explains Eric Moss, a FINRA vice president and counsel for emerging regulatory issues.
Client privacy and security of data -- B/Ds and their reps are closely monitoring a Securities and Exchange Commission case involving NEXT Financial Group. The outcome of that case likely will provide a strong indication of how the SEC will interpret Regulation S-P going forward, particularly as it relates to securities firms' handling and use of client information when new reps bring over customers from prior firms.
"We're watching this one very carefully to see where the SEC will draw the line," says Oberlin. "Until then, a lot of us will be afraid to go near the line."
Brian S. Hamburger, JD, CRCP, AIFA, an attorney who founded Market Counsel, a New Jersey-based compliance consulting firm for investment advisors, says "it's too early to tell" the kind of penalties the SEC will impose for failing to comply with Regulation S-P. However, the case portends "a lot of new restrictions on the handling of data. What it means is putting in practice real steps to protect data."
Seminars -- Insurance and securities regulators at the state and federal levels are watching the seminar circuit closely. They want to see that event hosts don't overstep their legal authority by offering attendees investment advice when all they're legally licensed to do is provide guidance on insurance products. For protection, some broker/dealers are urging seminar-givers to get Series 65 and/or Series 6 licenses, and to submit (via their broker/dealers) the content of their seminar presentations to FINRA for pre-approval.
New products and instruments -- When emerging financial products become popular, regulators take notice. One instrument they're watching closely nowadays, according to Moss, is the structured product. "These are very complicated products. We want to be sure reps understand what they're selling."
Workplace investment advisory programs created by the 2006 Pension Protection Act -- There is lingering uncertainty about how to design and implement certain features of PPA benefits programs, says Oberlin, including automatic enrollment and default investment alternatives.
Stay above the fray
There's no getting around it: regulatory compliance is a crucial part of doing business. Here are some suggestions for efficiently managing compliance responsibilities:
- Devote resources up-front to compliance efforts. Be proactive rather than reactive, advises Moss, by developing and participating in a culture of compliance. Commit to training and continuing education.
- "Document everything," says Hamburger. "It's a practice that doctors and lawyers have had to do forever and it's a great practice for reps to get into."
- Do what's best for the customer.
- Don't take short cuts.
- Ask your firm about the steps it's taking on the compliance front and push for proactivity.
- Use regulators' resources, including FINRA's Firm Gateway, providing Web access to an array of frequently used compliance applications. FINRA also offers compliance-related workshops, podcasts and training programs. The SEC and NASAA Web sites offer a wealth of information on federal and state regulatory programs and actions.
These are all steps worth taking, says Oberlin, to stay on the right side of the line -- and out of FINRA's monthly log. "Unfortunately, in this business you have to learn from other people's mistakes. Or you'll get barred by your own."
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