Independent financial advisers' ability to share their expertise in areas that are often outside the traditional role of a financial adviser — such as tax and accounting, insurance and even legal advice — is a crucial part of the value the independent model offers to Main Street investors, especially those who live in smaller communities where other options for accessing these services may be limited.
With this in mind, we applaud Finra's recent announcement that it will re-examine its rules covering these outside business activities (OBAs) and the similar (but distinct) category of private securities transactions, or PSTs. The review comes as part of Finra's ongoing Retrospective Rule Review, under which the regulator is taking a fresh look at its existing regulations to gauge whether they remain effective in accomplishing their intended goals.
In our role as a think tank for the independent financial services industry, FSI is actively working to dispel ongoing confusion in this arena by educating our members on the current rules governing OBAs, their application and relevant Finra enforcement trends.
Earlier this month, we hosted an in-depth webinar — attended by over 250 members — featuring insight on these topics from experts at our partner law firm Eversheds Sutherland.
In addition, FSI's various member councils collaborated with Eversheds Sutherland to develop a white paper that provides our members with information on the requirements of Finra's current rules, related enforcement actions and key take-aways for firms, as well as benchmarking information on current FSI member practices.
We sought to leverage the insight of the FSI community and the extensive experience of our partners to provide actionable best practices to help our members respond to common issues and pitfalls regarding OBAs.
Dealing with undisclosed OBAs, for example, is a challenge that often places firms at risk of an enforcement action if they fail to detect the activity or follow up aggressively enough in cases where an adviser's request for approval was denied. At the same time, firms are often unsure of the proactive steps they can take to help them spot undisclosed OBAs.
There are numerous proactive methods firms can use to protect themselves in this regard, including: requesting tax returns from a risk-based (or random) selection of advisers, then comparing reported revenue and production against their declared income to identify potential discrepancies; use of software to catch changes to advisers' websites that do not match firm-approved website templates (including, for example, changes to reflect new service offerings); and regular reviews of OBAs that were not approved to ensure that advisers did not move forward with them after permission was denied.
We addressed these concerns through an in-depth examination of recent Finra enforcement actions. In particular, we highlighted one case in which an adviser was approved to conduct business through an unaffiliated RIA. Although the firm properly assessed the initial request for approval, it failed to supervise subsequent securities transactions — including some for existing firm customers — through the RIA as separate PSTs, incurring a fine from Finra as a result.
OBAs are a vital component of the value independent financial advisers offer to their clients and communities, and FSI is pleased that Finra is reviewing existing rules to help ensure their ongoing effectiveness. In the meantime, we are also proud to assist our members and others in developing greater clarity on Finra's rules, so they can continue to provide these crucial services while also ensuring compliance.
Dale Brown is president and CEO of the Financial Services Institute.