More On Legal & Compliancefrom The Advisor's Professional Library
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
The Financial Services Institute (FSI) has built a solid working relationship and dialogue with FINRA and its leadership over the years, constructively engaging on behalf of our members. We were pleased that FINRA CEO Rick Ketchum took part in our National Discussions last month, and his willingness to answer the top questions on the minds of our members. Our voice is also heard through 20 FSI members currently serving on FINRA District Committees around the country.
Part of our engagement with FINRA is also to let them know when they have gone too far. That is clearly the case with the substantial fee increases the organization recently proposed for broker-dealers and financial advisors—increases that would hit small firms the hardest.
FINRA’s proposed fee hikes would impose significantly higher costs on broker-dealers for branch office registrations, new member applications, continuing membership applications and Central Registration Depository (CRD) filings, as well as for advertising and sales literature reviews.
As we made clear in our comment letter to the SEC on July 19 (and in an interview earlier this week with AdvisorOne), this is clearly not the right time to impose these higher fees. Many IBDs are struggling to stay afloat in today’s weak economy, and FINRA’s increased charges would come on top of recent increases in SIPC assessments, SEC fees, fidelity bond premiums, and errors and omissions (E&O) insurance premiums. Imposing further fees on broker-dealers at this time could threaten to drive many of them out of business.
Aside from the timing, the size and scope of these new proposed fees will collectively have a serious negative impact on IBDs, most of which already operate within razor-thin margins (from 2004 to 2009, the median profit margin for IBDs was 1.7 %, according to FSI’s 2010 Broker-Dealer Financial Study).
This is especially true for IBDs, which predominantly serve Main Street American investors. If FINRA’s new fee structure remains intact, much of the costs will be passed on to this group of investors, many of whom could be priced out of the market entirely as a result.
As Americans continue to struggle with high unemployment and looming retirement obligations, we should be doing everything we can to make professional financial advice more widely available to them. FINRA’s proposed fee increases would undermine that goal.
We are also troubled by the lack of justification FINRA has offered for these fee hikes. Aside from a statement that the fees are necessary to ensure that FINRA is “sufficiently capitalized to meet its regulatory responsibilities,” they have not offered an adequate explanation for imposing these increased costs.
As recently as August 2009, FINRA made similar statements regarding significant increases in its Personnel Assessments and Gross Income Assessments, saying that after the market downtown it needed the extra revenue to “stabilize its operating cash flows.” Less than three years later, FINRA is already proposing additional fee increases.
Nearly every organization in the country has been affected by the financial downturn, including IBDs, many of which responded by cutting costs and increasing efficiency. It’s time for FINRA to apply the same type of operational discipline to its own organization.
As I mentioned above, FSI enjoys a constructive working relationship with FINRA. No one, however, should construe this relationship as a blanket endorsement of everything FINRA does. We have long held that FINRA is an imperfect regulator, and that it needs to do a better job realizing the unintended consequences of its proposals. The burdens associated with these new fees offer them the opportunity to do just that.
The proposed increases would greatly inflate the cost of doing business for financial services firms, hitting smaller firms the hardest. Our mission is to create a healthier, more business-friendly regulatory environment for our members, so we are urging FINRA to reconsider these fees, and to be mindful of their potential impacts on small broker-dealers, financial advisors and the Main Street clients they serve so well.