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2019 Exam Priorities May Give Clue to Future of Broker-Dealer Regulation

By Crucial Clips     July 10, 2019
The following text is a transcript of a portion of a speaker's presentation made at an industry conference or during an interview. This transcript solely represents the view of the individual who spoke, and not the view of Financial Advisor IQ or any other group.
Source: FA-IQ, Jul. 10, 2019 

MRINALINI KRISHNA, REPORTER, FA-IQ: While 2019 regulatory exam priorities didn’t really hold any surprises, experts say they nonetheless reveal where regulators may want to move directionally.

MARK QUINN, DIRECTOR OF REGULATORY AFFAIRS, CETERA FINANCIAL GROUP: Well, I don't think we saw anything that we didn't really expect. It's been evolutionary rather than revolutionary over the last couple years.

But I think one thing that has been a substantial sea change in the way the regulators approach enforcement issues, is the what I call the initiative theory. They've done this -- the SEC did it with mutual fund share classes and advisory accounts, and now Finra’s doing it with 529 plans. I can't comment on where the industry in general is with respect to these. But it's an interesting enforcement approach that rather than go case by case, firm by firm, build the evidence and decide whether or not it's worth taking the enforcement action, to sort of throw out a wide net over the whole industry and say, “We think this is a significant problem, we're going to give you an opportunity to come in and cure or fix it.”

Maybe that's a good idea in some cases, maybe it isn't. There were some comments from SEC Commissioner Hester Peirce the other day about this, and suggesting that it may not necessarily be the right approach in all cases, because it tends to mix people with different factual situations and throw them into the same bucket.

So, I think this is something that's going to develop -- you heard Robert Cook say they don't have plans to adopt and further initiatives like the 529. But I think what regulators and the industry will find is, this is a much simpler way to dispose of problems that they perceive as pretty widespread.

MRINALINI KRISHNA: The self-reporting approach has not gone down well with the industry in general and Finra reiterated it has no immediate plans for more such initiatives. Experts say detailed regulatory guidance would prove to be more useful instead.

FRANCOIS COOKE, MANAGING DIRECTOR BROKER-DEALER PRACTICE, ACA COMPLIANCE: I don't think that self-reporting is the answer for the industry to address their issues. I think it sends a lot of fear in the industry. I think it's probably more proactive for Finra or the SEC to send out guidance to them, let the industry be aware of certain issues. I think people forget that there are literally over a thousand regulatory requirements. When you take into account all the additional guidance and interpretations are of those rules, people lose sight of the fact that there's just so much that compliance has to focus on and that the representative has to comply with.

So again, I think the most important thing regulators can do is to do more regulatory notices. Tell firms “Hey, you need to address this.” Give the industry time to address these issues, and then follow up with inquiries to see if they they’ve been addressed.

MARK QUINN: This has been a theme that we've had with Finra and the SEC over the years: We may agree with you at the end of the day on the issue, but it's important for regulatory agencies to publish guidance, and be out there advertising their views. You know, it sort of feels like 'Gotcha,' to the industry when all of a sudden we go from something's come up in an exam to it's going to enforcement action, especially when it's a practice that's relatively widespread, or even more or less universal to industry. And I think we've seen that a lot, you know -- there are share class issues, the 529 issue. These are things where practices are pretty standard across the industry.

MRINALINI KRISHNA: And these are the issues some experts feel could see a lot of enforcement actions this year.

TODD CIPPERMAN, FOUNDING PRINCIPAL, CIPPERMAN COMPLIANCE SERVICES: I suppose you can can't get away from suitability and fiduciary duty, but certainly, a continuing area of concern is mutual fund share classes. [It's a] huge issue, you know, brokers and advisors recommending share classes that may not be the most efficient necessarily for the clients, particularly where it's proprietary product or there’s revenue sharing coming back to the broker-dealer. I think that’s a huge area.

MRINALINI KRISHNA: Another observation of this year’s regulatory priorities reveals a move towards rules modeled on the banking system.

FRANCOIS COOKE: There was one in particular which focused on risk areas -- credit risk and liquidity risk. Now, I understand that doesn't really deal with, you know, a retail-type environment. But it does speak to the fact that the broker-dealer regulators are slowly following the banking regulators. So things like risk, vendor management, managing third parties, these are all things that the banking regulators have been doing the past 10 years. So I think there's an evolution.

So, if people want to look to the future, they should look at where the bank regulators are right now. And that's where the broker-dealer regulators are going to be. In particular, a lot of the elements of the examination priorities focus on technology -- whether it's products, which is digital assets, or how firms use data, to make sure they comply with regulations. That's where the regulators are focused on.”