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Regulation and Compliance > Federal Regulation

The Challenge Of Self-Supervising Compliance

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Most producers value the independence of being their own boss and many try to become as independent as possible of the companies whose products they sell.

Being your own boss brings freedom, but also the responsibility to self-supervise compliance and market conduct. There are other aspects of self-supervision, including administration, training and logistics. However, of all of the aspects of being your own boss, compliance self-supervision poses some of the greatest risk.

For a registered representative of a broker-dealer, there is no such thing as self-supervision. Registered representatives do not have independence from their broker-dealer, since no matter how independent the producer believes he or she is, the broker-dealer has the responsibility and the right to monitor and supervise the representative. So for registered business, the producer is monitored and supervised by the broker-dealer and in many cases quite closely. Most broker-dealers monitor and supervise e-mail communications with the public and conduct file reviews. They also scrutinize sales to seniors, replacements of variable products, 1035 exchanges, mutual fund switches, etc. In addition, they monitor continuing education and mandatory attendance at annual meetings.

For the independent producer’s registered side of the business, he or she cannot escape the broker-dealer’s monitoring and supervision. Though some broker-dealers have more aggressive supervisory programs than others, all must supervise their registered reps.

However, for the non-registered side of a producer’s business, the independent producer is appointed with several companies, making direct supervision by any one company impractical. While there may very limited monitoring and supervision by the companies whose products the producer sells, generally speaking, for the traditional side of the producer’s business, he or she is the boss.

Self-supervising compliance

There are 5 areas where self-supervision of compliance is critical for the independent producer to avoid creating potential risk. There are other areas where there are compliance responsibilities (e.g., licensing, anti-money laundering) but in these areas companies tend to exert somewhat greater monitoring and control.

These are the 5 critical areas:

–Compliance communications. Producers need to be up-to-date on regulations and each company’s policies and procedures to avoid compliance and market conduct problems. Most companies hold the producer responsible for keeping up-to-date. Since some companies send out bulletins and notices of changes to policies, procedures and regulations, the total volume of compliance communications for a producer who has relationships with many companies can make distinguishing the important issues from less important ones difficult.

Producers need a system for collecting, analyzing, implementing and documenting all of the compliance changes they must react to and comply with. Weekly monitoring of incoming notices and updates needs to be done. Producers need to maintain a compliance communications file and monitor that they have implemented new policies and procedures by their deadlines. If the producer has knowledgeable administrative staff they can help out in the collection and documenting, but the producer must be involved in the analysis and implementation.

–File Maintenance. Good files–complete, accurate and up-to-date–can spell the difference between resolving compliance issues in favor of the producer and fines and legal expenses above and beyond what an E&O carrier will cover. Good client files can show that the producer met his or her obligations to the consumer and company. Without evidence, compliance issues often become a situation that pits the word of the consumer against the producer with the final decision often going against the producer.

Producers need a system for collecting and maintaining the appropriate client information in their files. They need to monitor their file maintenance on a monthly basis to keep their files in correct order. If the producer has knowledgeable administrative staff they can help out in checking that files are complete and in order, but the producer must make certain the correct information, forms, etc. are used and brought back to the office for filing.

–Proper Use of Advertising and Sales Materials. Advertising materials should be approved by the company whose product is being sold before they are used. They should be up-to-date and specific to the product being sold. Producers need to keep up-to-date, purge old materials, never write on sales materials and avoid using home-grown sales materials, if they want to stay out of trouble. Failure to use sales materials appropriately can lead to claims of misrepresentation. Without someone looking over their shoulder, this can prove tough for producers.

Producers need to know advertising and sales material rules and have a process for monitoring sales material use. Though it is advisable to only use company approved sales materials, some producers need to know how to get their personally created sales material approved and when they can and cannot use these materials. If the producer has knowledgeable administrative staff they can help out in maintenance of up-to-date sales materials, but the producer must be aware of what he or she can use and avoid using unapproved or modified sales materials or misusing them.

–Review of Suitability and Replacements. Perhaps the hardest thing for a producer to self-supervise is the suitability of sales and the appropriateness of replacements because of the objectivity it takes to review your own recommendations. However, without a process for reviewing suitability and replacements, the producer may be submitting cases that can come back to haunt him. Independent producers should not rely on companies to monitor and supervise suitability and replacements since they may be focusing only on receiving the correct forms and hold the producer responsible for what is on the forms.

Producers need a system for developing and documenting their recommendations during the sales process that lends itself to review after the sale. This review should be done on an ongoing basis before the application is submitted to the company, so that the producer has an opportunity to modify any recommendation before it is submitted. If the producer has knowledgeable administrative staff, they can help make certain that the correct forms have been completed accurately, but in most cases they can not review the basis of the producer’s recommendation.

–Confidentiality and Privacy. Protecting the confidentiality and privacy of consumer and company information needs to be done on an ongoing basis. The producer is responsible for all the confidential information collected as part of the sales process and client service process. This requires a system to protect data in the producer’s office and at point of sale. Confidentiality should be monitored on a regular basis to ensure that policies and procedures are being followed. If the producer has knowledgeable administrative staff, they can help carry out the bulk of this ongoing monitoring.

Being your own boss brings challenges, with monitoring and supervising compliance and market conduct of traditional product sales perhaps some of the biggest challenges independent producers face. Producers who are serious about being their own boss need to treat their professional practice as a business and develop and implement the processes and systems that will reduce compliance risk.


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