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Regulatory Scope Creep: a Look at the Five-Year Trend

Regulatory Scope Creep: a Look at the Five-Year Trend

18:46 14 March in Articles Written by Jon Henschen

March 2013
by Jon Henschen

At the recent OneVoice 2013 FSI Broker Dealer Conference held in San Diego, California, a broker dealer president was quoted as saying,  “Regulation, like the Obama tax, is here to stay, just deal with it. It’s a cost of doing business.”  It surprised me to hear this from the head of a broker dealer, let alone that it was said at the FSI Conference, which is one of the few forums our industry has to advocate against increasing Washington intrusion.

For many of us in an already over-regulated industry, we are growing numb to the daily onslaught of regulatory proposals. In our world of recruiting, we can look back just five years and see a drastic change in the regulatory landscape. However, when you see the changes in real time it seems gradual with just a few changes here and there, perceived as “not a big deal.”

The Regulation Landscape Five Years Ago

  • It was rare that you saw firms looking at a representative’s personal credit record when changing broker dealer — Today, broker dealers scrutinize these records with a fine tooth comb, and rejecting advisors with credit scores under 600 is becoming increasingly commonplace.
  • Representatives with multiple marks on their compliance record were rather easy to place — Today, many firms may accept someone with one mark, however, even that is “iffy.”  Our firm was working with one representative last year who had three marks that were all denied with no fines paid.  A broker dealer rejected him saying it showed a pattern. I responded, “Yes, a pattern of innocence.”
  • Reps could do concentrated positions in a portfolio with 40% in a single stock. Now, they are hard pressed to have 20% in any one position.
  • Reps could do 1035 exchanges of variable annuities with relative ease. At many firms today it has become extremely difficult to justify any sort of switch.
  • It was common to see reps actively managing sub-accounts in variable annuities (after waiting one to two years after getting paid a commission on the sale) — In today’s environment, reps can’t manage a variable annuity unless they use a no-load VA product.
  • Representatives did their fixed insurance away from the broker dealer. Today most firms require any sort of indexed product to be done through the firm, and numerous firms are requiring other fixed products to also run through the broker dealer.

Boon for Securities Attorneys

Litigation against representatives and broker dealers is on the rise, creating a windfall of billable hours for securities attorneys. We are seeing plaintiffs winning cases not only as a result of market loss but also due to not enough market gain. Broker dealers now have to contend with cases where their reps purchase variable annuities for their own portfolio, arbitrate against their own firm claiming they didn’t understand the product and then win the arbitration.

200 New Rules: Just Deal with It? Or, I’m Not Going to Take It Anymore!

The federal government has no new infrastructure projects or education improvements slated over the next four years. Yet, it has a mountain of new regulations that will intrude upon every aspect of daily life.  The economic toll that federal regulation is consuming is now up to ten percent of our GDP.  For broker dealers, we are looking at approximately two to three more years for new rules from Dodd Frank to be assimilated according to regulatory insiders, although it’s possible it could take even longer because you never know what intervening events will occur that may occupy their time on unexpected rulemaking measures.

On its current course, FINRA is quickly becoming a recipe from the Donner Family Christmas Cookbook. Everything is the domain of law and everyone is a potential criminal, which allows FINRA to impose ever increasing fines while the number of broker dealers and representatives declines as never before.

As FINRA continues to drill down on every aspect of our industry you have to wonder if over the next few years the only representatives who will be qualified to be in our industry will be those who can walk on water. With the more difficult rules yet to be sifted through (such as the current “Mark Up Rule,” that feeling of gradualism will likely be replaced with overwhelming dread. Instead of “just deal with it, it’s the cost of doing business” perhaps we’ll hear cries like out of the movie, Network, “I’m mad as hell and I’m not going to take it anymore!”