Now that the Broker/Dealer Exemption Rule 202(a)(11)-1 which exempted brokers from regulation as an investment advisor even when they were being paid fees for investment advice in fee-based brokerage accounts, has been vacated by the U.S. Court of Appeals for the D.C. Circuit, how will it affect compliance for independent B/Ds?
In order for a B/D to protect itself, it may come down to how that firm treats its individual investor clients even more than the paperwork necessary to change fee-based brokerage accounts to either investment advisory or commission-based brokerage accounts, though some B/Ds say that may be daunting. Clients will have to choose between a commission brokerage program, and an advisory program, says Terry Frank, managing director at Century Securities in St. Louis. “I don’t think it’s compliance issues–it’s more compliance work, getting the forms correct, making sure the clients sign them and getting it done before the deadlines.”
Not all B/D executives agree that it’s a paperwork-driven change. “We had been in the process of modifying our model in response to 202,” says Walter White, senior VP and COO of Woodbury Financial Services, in Woodbury, Minnesota. “We had many reps who were not investment advisors, so part of our reading of 202 is, we wanted to encourage reps to move in that direction. We did see a big surge of reps getting registered [as investment advisors before the rule was overturned]. What will happen next is that we’ll be looking at other activities that potentially really are advisory, [including] use of planning tools. There’s a gray area: planning activity, asset allocation–things that reps do every day, not on a fee basis.” He emphasizes that Woodbury has had “open architecture” with regard to products and provides reps with “product agnostic education.”
The “suitability standard has broadened; it’s much more difficult today to draw bright lines between what’s the fiduciary standard versus the suitability standard,” as White puts it. “I don’t see [reps] being held to much of a lower standard on the suitability side.” That may mean a migration to the fiduciary standard at some B/Ds, coming full circle to NASD Chairman and CEO Mary Schapiro’s argument to “focus on doing what’s right for the client.”