When it comes to the potential liabilities associated with compliance failures, the numbers don’t lie.
Consider a recent arbitration award case involving a small, independent broker-dealer on the East Coast. Regulators slapped the firm with a $3 million fine, holding it, its CEO and its chief compliance officer jointly and severally liable — which means if the broker-dealer is unable to pay, those two executives are on the hook.
There are countless other stories like this, and they all highlight a fundamental reality that confronts many smaller IBDs and offices of supervisory jurisdiction (OSJs) in today’s environment. That is, the difference between having a thriving enterprise and going out of business due to a single compliance misstep.
Performing required compliance and supervisory functions is both time-consuming and costly, making proper oversight a tall order. The onset of Reg BI only will raise the stakes and make this undertaking more expensive.
It’s hardly surprising, then, that small-to-medium-size firms and OSJs, faced with increasingly slim margins, are having a hard time recruiting advisors. True, expanding compliance and supervision costs are just one part of a complicated picture, but it’s impossible to ignore how the regulatory climate is constraining the way these types of firms can operate.
It is feasible, however, for small to midsize IBDs, as well as their OSJ affiliates, to have top-notch compliance and supervisory oversight without breaking the bank. The answer is outsourcing tasks such as branch inspections and email review.
To be sure, these are not responsibilities you can farm out to anyone other than an experienced, discerning, unbiased professional who has a long history of contending with compliance issues that are unique to our industry. For example, if a firm outsources branch inspections, an experienced professional will more than likely do their homework before exams and work through their checklist diligently but quickly, aiming to wrap up an exam in one day.