Broker-dealers that still depend on an actual “eyes-on” evaluation of transaction data may be wasting a lot of time and money.
About 40% of broker dealers use manual compliance systems that require a person to review documents, according to a survey of 53 broker dealers-commissioned by Albridge Solutions Inc., a Pershing LLC affiliate. Clearing giant Pershing, part of The Bank of New York Mellon Corp., makes the Albridge sales compliance system available to its clients.
“Automated compliance-monitoring systems offer some cost savings and some cost avoidance,” such as fines, settlements and additional staffing needs, said Patrick Yip, an Albridge director.
The number of brokerages with fully automated compliance systems appears to be growing, according to the survey. B-Ds with automated compliance practices have increased to about 42% of broker-dealers, up from 30% only two years ago. About 18% of broker dealers are using a combination of automation with a review by an individual, which is down from 33% in 2010, the paper noted.
Most B-Ds — about 86% — spend up to 10% of revenue on expenses stemming from compliance. A smaller number, about 14%, are spending about a fifth of their revenue on such efforts. Albridge claims that brokers with automated compliance systems should have lower compliance costs — about 7% of revenue.
Given the welter of federal and state securities rules that brokerages now face, it's not surprising that most B-Ds reported a hike in the number of people employed to handle compliance. About 55% said they have increased compliance staffing by more than 11% since 2010. About 11% of firms said compliance personnel has increased by 30% or more, according to the survey.
Review of the suitability of products for investors, especially elderly investors, is the top compliance challenge facing broker-dealers. In 2010, suitability concerns ranked third. Albridge said the rising concern about suitability stems from warnings issued this year by the Financial Industry Regulatory Authority Inc.
“We are aware that Finra is concentrating on suitability," Mr. Yip said.
Of note: Social-media compliance, for the first time, is considered one of the top five challenges by broker dealers, as more have adopted policies and procedures to review and retain communications made through social media, according to the paper.