Jon Henschen, president of Henschen & Associates, a broker-dealer recruiting firm, likens the torrent of regulatory changes the industry has seen recently to “having a cut on your finger, and they’re cutting your arm off to repair it.”
Henschen has more than 20 years in the industry, and his insights into the independent broker-dealer channel have been published by no less an authority than Bloomberg, The Wall Street Journal and (full disclosure) Investment Advisor.
While the Dodd-Frank Act’s effect was largely felt by wirehouses and big banks, the independent channel hasn’t escaped increased bureaucracy that, Henschen says, is “grinding down the business.” For example, “the ‘know your customer’ rule allows broker-dealers to take a risk-based approach to implementing new suitability factors, but it’s doubtful that broker-dealers and regulators will see eye to eye on how the changes are to be implemented or documented, how firms endeavor to educate their advisors,” he says.
Henschen anticipates an increase in “frivolous lawsuits” as a result of regulatory changes. “I had one chief compliance officer that characterized the new changes as ‘unreasonable, unrealistic and virtually unenforceable,’” he recalls. “Of most concern to the CCO was the added liability the new requirements presented to registered reps and BDs, like when, for example, a customer files a false complaint in an attempt to recoup market losses. This rule will be a boon to claimants’ lawyers and will simplify their jobs tenfold.”
Prior to FINRA, Henschen said, audit exam teams tended to be staffed with individuals who had worked for many years in the industry. “Today, we see exam teams staffed by twenty-somethings who have never seen a back office until their first assignment. They’re hostile, they’re paranoid and they seem eager to take their first industry scalp,” he says.
This new breed, Henschen says, actually seems disappointed if they don’t find the violations they’re expecting. Henschen related a broker-dealer’s experience with an auditor who had no prior securities business experience and had only two weeks’ training before conducting the audit. “The quality of preparation and training given to people conducting broker-dealer audits has fallen off a cliff. It’s a world of difference, and we hear this repeatedly,” he says.