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Regulation and Compliance > Federal Regulation

Regulatory Certainty. Really?

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As new FINRA rules are introduced, broker-dealers are forced to deal with a regulatory environment of general guidelines and broad interpretations of the facts and circumstances of each case. They don’t have the benefit of a detailed “specification” for compliance. What follows are observations of how some are approaching the new rules and creatively meeting the challenges of compliance when certainty is lacking.

Certainty–and, not so much

There is certainty in the wealth management community regarding FINRA rules 2090 and 2111:

  • Regulations are final.
  • Implementation is July 9, 2012.
  • Regulatory scrutiny is increasing.
  • Cost of compliance is increasing.

There is certainly interest among broker-dealers in the implementation of the rules. This interest was obvious in the standing-room-only session at the FINRA Annual Conference session titled “Suitability and Know Your Customer.” The body language of the attendees was telling. I didn’t observe any indication of certainty from the attendees that they knew precisely what they needed to do and how they were going to comply.


In spite of the impending implementation, significant disparity exists in preparation for the regulations. Some broker-dealers have been preparing for the past year. Conversely, some broker-dealers are just beginning the process.

Why, with the impending implementation, are we seeing such disparity in the response to the regulations? There are a couple themes that emerge:

  • Confusion about what compliance looks like.
  • Reliance on clarity to come through enforcement.

What compliance looks like

“Investment Strategy” is one of the key elements of FINRA 2111. Supplemental materials indicate that investment strategies should be “interpreted broadly.” Some believe that this broad interpretation and a shift away from transaction-based suitability is the first step toward a fiduciary standard.

Another point of concern is the explicit hold order. What once was a simple conversation with a client about market conditions could become an explicit hold order—a recommendation requiring the same documentation, review and costs as the sale of a new product.

Several concerns about the explicit hold recommendations go beyond implementation concerns.

  • Will it inhibit client/advisor communication?
  • Will it encourage transactions that would not otherwise take place?
  • Will this serve any real benefit for the average investor?
  • Will it serve only as fodder for increased litigation?
  • All of the above?

Clarity through enforcement

To a certain extent, there is agreement that the practical requirements will be defined through the FINRA examination and audit process. Obviously, the risk is becoming the object lesson of the industry.

A variation of this view is large firms will drive the expectations of examiners, resulting in systems and processes that are completely impractical for small to mid-sized firms. Speculation exists that this could drive mergers or acquisitions in order to generate the economies necessary to implement more complex compliance processes.


Though varying widely, the response has been enhanced collection of data to demonstrate reasonable diligence. Suffice it to say that plans range from firms requiring a single brief form to firms requiring multiple multi-page forms.

Implementation on most automated platforms requires significant IT expenditures. Those platforms generally lack the agility to efficiently evolve as interpretations mature. They also force broker-dealers into a one-size-fits-all solution—not generally appreciated by a group known for their independence.

The most common approach is a redesign of forms specific to each firm. Why? Generally, it’s because of the familiarity to the population served and ease of customization to their interpretation of the rules. We believe it also gives them the assurance that they can easily change these forms as the implementation of the rules evolves with their changing interpretation.

This approach comes at a price:

  • Loss of automation opportunities.
  • NIGO (Not In Good Order) rework.
  • Manual/paper processes.
  • Duplication of effort—no reuse of information from other platforms.

As the complexity of the data increases, the benefit of an automated solution increases as well. Broker-dealers are looking for solutions that can offer flexibility while also minimizing operational costs associated with rework and tech-heavy solutions.


All firms are taking the new rules seriously. The potential of non-compliance resulting in damaged reputations and fines for the advisor and firm are real. The consensus is that there will be more clarity a year from now.

Enforcement will be the catalyst that drives the “compliance specification.” Even then, implementation will be unique to each firm just as compliance will be determined by the facts and circumstances of each case. In an environment where margins are always being pressured, firms that position themselves to respond to the changes efficiently will be served well.

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