Page 40 - Investment Advisor - October 2021

have ramped up dramatically. To give tered persons and existing and potential Not only will working capital have to go
perspective, in the mid- ‘90s when I customers, review those recordings and in a non-productive direction, but their
brokered at the wirehouse, Prudential file reports with FINRA. The taping rule reputation will be harmed and their abil-
Securities, our branch manager said in was designed to prevent fraudulent and ity to recruit will be much more difficult.
passing, “If a broker doesn’t have a cou- improper practices in the sale or market- For advisors with clean compliance
ple of dings on his compliance record, ing of financial products and behavior that are with such broker-dealers, they
he’s probably not aggressive enough.” that may otherwise cause customer harm. end up guilty by association and will
That mindset was quite common in the These firms had a significant num- have fewer resources at their disposal
‘90s, but today the tolerance for bad bro- ber of registered persons who previ- due to financial resources needing to go
ker behavior is much less. ously worked for firms that have been to the FINRA separate account.
Since 2010, we’ve seen a sharp decline expelled from the industry or have had This could very well be another bottle-
in the number of advisors [who] were their registrations revoked for inappro- neck event that puts broker-dealers with
active stock and bond traders, and with priate sales practices. Firms that are told high concentrations of problematic advi-
that decline, we’ve seen a drop in the they will be categorized as a “restricted sors out of business as well as flushing
number of broker-dealers that catered firm” will have a six-month window to more representatives out of the industry.
to that market, many of whom Another conundrum for
had poor compliance histories “In spite of the downside for these broker-dealers is advisors
on a BD and rep level. For broker-dealers that get the label with numerous compliance
the consumer, this was over- disclosures that oftentimes
whelmingly a positive change. of rogue brokerage/restricted are large producers because a
Today, we still have active broker-dealer would not have
stock and bond traders and the firm, the benefit will be fewer brought them on unless the
firms that cater to this mar- unethical representatives and risk/reward [ratio] made sense
ket, but they are in far lower (they won’t bring on a rep with
numbers and are more concen- the [BD]s that harbor large five disclosures with $100K of
trated in New York City, Long concentrations of such reps, GDC, but they’ll bring on a
Island and Southern Florida. $1M GDC producer with five
This rule is intended to have which will be good for the public.” disclosures). Having to let go
money set aside to pay for liti- of advisors with numerous dis-
gation the firm may owe to —Jon Henschen closures on their record can
clients in the event the firm is result in losing their primary
closed. There are many situations where shed enough advisors with poor compli- revenue generators.
a client has been wronged by an unethi- ance records to not be included in these Another concern is that over time,
cal advisor, the case goes to arbitration additional requirements. will FINRA tighten the thumb screws by
and the client is awarded a large sum for making more inclusive what is catego-
restitution, but the firm ends up closing Is coming into compliance a heavy lift rized as problematic? Today an advisor
their doors and the client never gets a for these firms, or it doesn’t matter how from an expelled firm and dismissed for
dime. These high-risk broker-dealers heavy because the change is warranted? cause is problematic, but a year from
needing to have this reserve fund con- The compliance mandate is either get now, any advisor with three or more
trolled by FINRA will be a layer of pro- rid of a certain number of your poor disclosures over the last 10 years will be
tection for the public. compliance reps or you will need to added as problematic. Eventually, the
set aside cash or qualified securities only advisors in good standing will be
What will BDs have to do to be compliant? into an account controlled by FINRA those that can walk on water.
Firms will have six months to make to pay for arbitration awards. For the In spite of the downside for bro-
changes to not be under the category broker-dealer, this is money that could ker-dealers that get the label of rogue
of “restricted firm.” Firms that will be have been used for technology improve- brokerage/restricted firm, the benefit
categorized as “restricted firms or rogue ments, more compliance people, recruit- will be fewer unethical representatives
brokerages” will be similar to the firms ing, additional services, etc. and the broker-dealers that harbor large
that fall under the FINRA Taping Rule concentrations of such reps, which will
(FINRA Rule 3170). How do you view these requirements? be good for the public.
The taping rule requires certain firms We view these requirements as a black
to install taping systems to record all tele- eye and potentially drive out of business Washington Bureau Chief Melanie Waddell
phone conversations between their regis- most firms that fall into this category. can be reached at [email protected].

38 INVESTMENT ADVISOR OCTOBER 2021 | ThinkAdvisor.com