The biggest threat to broker-dealers is their outside business dealings, warned a Pershing executive leading a panel of compliance experts at the Pershing Insite conference.
“This is how bad reps are stealing clients’ money,” said Pershing managing director and managing counsel Joan Schwartz. At a Wednesday session focusing on compliance and regulation at the conference, in south Florida, the panel addressed a number of issues that both broker-dealers and RIAs are facing, including complying with FATCA and the SEC’s large trader rule, which may apply to some RIAs.
Turning back to the issue of broker-dealer compliance, Schwartz pointed out to the home office personnel in attendance, “since you approve these” outside business operations, make sure you conduct periodic reviews. “You are the most important person to stop” such frauds, she said.
Some broker-dealers are not only asking about those outside dealings, but also scrutinizing reps’ personal checking accounts and their spouse’s checking accounts to look for anomalies. In addition, she suggested that BD compliance staff make unannounced visits to reps’ offices and even conduct random calls to end clients to ensure that those clients are not being taken advantage of by reps.
Another member of the panel, Pershing director Lynn Young, suggested broker-dealer compliance officers take an even more direct approach. “Open that locked file cabinet” in reps’ offices, she suggested, speaking both literally and figuratively. “Look at the outward appearance of the rep as well,” she said, to discern if said rep had recently been spending beyond his or her usual means, even to the point of determining if he’s now sporting expensive jewelry or driving a particularly expensive car.