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Compliance Costs May Be Strangling BDs, Regulators Say

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Top regulators at the Securities and Exchange Commission and Financial Industry Regulatory Authority said Thursday that they’re worried that the cost of compliance is contributing to the dwindling number of broker-dealers, and that tailored rules for such firms may be required.

During a Thursday panel discussion led by Pete Driscoll, head of the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations, at the joint SEC, FINRA Compliance Outreach Program for Broker-Dealers event held at SEC headquarters in Washington, SEC Commissioner Michael Piwowar and FINRA CEO Robert Cook conceded that regulators may need to consider tailored compliance measures for smaller BDs.

(Related: 3 Steps for Choosing the Right Broker-Dealer)

Driscoll noted that the number of broker-dealers has dropped from 4,600 five years ago to 4,000 today. He queried Piwowar and Cook on what they believe are the “main triggers” contributing to the decline.

Piwowar noted the “natural movement” of broker-dealers to the investment advisory model, adding that some of this was due in part to regulations like the Department of Labor’s fiduciary rule.

“My worry is that some of it may be the fixed costs of regulations have gotten so high,” he continued. “Is there something we can do to make the regulations more efficient without pulling back on investor protections so that we can allow the smaller broker-dealers to continue to survive and thrive?”

Cook conceded that the number of firms is falling off, but noted, however that “there are new entrants; it’s just that the number has gone down.” Further, he said, the number of registered reps “has stayed constant … and relevant to a few years ago, it’s actually up.”

This trend “might suggest … an actual consolidation going on in the industry. Smaller firms, or individuals at smaller firms, deciding that they want to associate with a larger firm. That might have to do with the cost of compliance,” Cook added. 

As Cook has stated previously, he’s “worried” about the smaller pool of BDs. “I do think there’s a role for the smaller broker-dealers to play. They sometimes provide services to communities who otherwise might be underserved, and they sometimes provide access to capital markets, especially municipalities, that might otherwise be underserved. And small business is an engine of job growth and we should be thinking of this issue of wanting to promote that engine of job growth,” Cook said.

Regulators, he continued, should look at the regulatory requirements and burdens on small firms.

“Are there things we can do to address those potentially through differentiation in our rules, or differentiation in the way we oversee firms, that will help create an environment where we can strike the right balance in terms of accommodating small firms and not compromising investor protection?”

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Piwowar noted that the agency is focused on preventing fraud against the elderly and retail investors, rooting out bad actors and managing marketwide risks.

The agency will “continue to be relentless” in terms of fraud against the elderly, via continued focus on exams as well as enforcement cases, Piwowar added.

“The protection of senior investors will be a large focus for us.”

Another priority will continue to be getting bad actors out of the industry, Piwowar said, but “we need to know where the bad actors are going.”

Cybersecurity still remains a top issue for the agency as well. “We need to make sure the market participants are prepared for cyberattacks, and at the same time if firms have done everything right and are still victims, we shouldn’t be punishing them. We want you coming to us rather than running away from us,” Piwowar said.

Cook noted that FINRA continues its crackdown on high-risk brokers, noting the self-regulator’s “renewed focus” and increased surveillance in this area, along with forthcoming “rules and standards to … provide guidance to help reinforce our surveillance capabilities.”

Driscoll noted OCIE’s focus on robo-advice and well as a risk team within OCIE – known as the large firm monitoring team – that is focused on “surveillance of the largest BDs in the world; That team focuses a lot on fintech, regtech and other tech developments.”

Piwowar and Cook agreed that fintech and regtech present both opportunities and challenges.

Fintech “makes regulators uncomfortable, which is a good thing,” Piwowar said. “There’s incredible opportunity in the fintech space.”

But there are “challenges for folks who want to innovate” because of the “highly complex” regulatory system, which is “fragmented.”

At the federal level, “we need to… put someone in the lead; I’ve suggested the SEC.”

Cook agreed that “It’s a challenge for regulators to keep up with” fintech, “but it’s one we have to embrace.”

RegTech, Cook added, is also “huge; you’re able to leverage technology to reinforce the compliance function.”

— Check out Destination Unknown: The 2017 Broker-Dealer Presidents Poll on ThinkAdvisor.