Compliance efforts help some independent broker-dealers avoid regulators

Some IBDs have consistently flown under regulators' radars

Jan 19, 2014 @ 12:01 am

By Sarah O'Brien

In the independent-broker-dealer industry, where regulatory spanks seem like an everyday occurrence, Cambridge Investment Research Inc. has emerged as the poster child for a well-behaved firm.

The IBD has exactly one re-portable event on the Financial Industry Regulatory Authority Inc.'s BrokerCheck database: a $12,500 fine in June 2007 related to reporting requirements for certain fixed-income securities transactions.

“I wish I had a secret recipe to share,” said Amy Webber, president of Cambridge, which has nearly 2,500 advisers, $56.6 billion in assets under management and $461.4 million in reported 2012 revenue (the most recent full-year data available). “Every time something horrible happens in our industry, it harms our collective reputation.”

A closer look at how Cambridge and other IBDs that seem to fly under Finra's radar approach their businesses reveals what industry watchers pinpoint as keys to minimizing regulatory action.


One of her firm's most critical business activities is recruiting, said Ms. Webber, who has been with Cambridge for 16 years.

“You have to do your due diligence on the advisers you are aligning yourself with,” she said.

Ms. Webber pointed out, however, that it isn't a silver bullet.

“Good people can turn bad, and good people can get in situations where they lose their better judgment,” she said.

Commonwealth Financial Network, which has about 1,500 financial advisers, $71 billion in AUM and $712.1 million in 2012 revenue, had a fairly long stretch without a scratch on its regulatory record.

The company had 18 regulatory events reported on BrokerCheck overall through 2009, then not another until 2013, when it had one.

The reprieve from regulatory action wasn't due to any overnight changes in Commonwealth's business practices, chief compliance officer Paul Tolley said.

In addition to focusing on carefully vetting its advisers, the firm continually updates its processes to avoid regulatory noncompliance.

“We revise and improve on an ongoing basis,” Mr. Tolley said.

“We try to be one step ahead of what's going on [with regulations],” he said. “We'll never be perfect, but when we make mistakes, we take steps to correct them so they don't happen again.”


Cambridge also focuses heavily on ensuring its compliance department forges a strong relationship with its advisers, Ms. Webber said.

One way the firm does this is by seeking input from its advisers when the industry faces a rule change. The goal is to make sure that the compliance process will work well for the advisers.

“If we don't make the process work for them, they are more likely to make a mistake,” Ms. Webber said.

The size of an independent broker-dealer makes a difference, said Peter Chepucavage, an attorney and industry consultant at Plexus Consulting Group.

“The more reps you have, the more likely you are to get complaints and disciplinary actions,” he said.

Indeed, LPL Financial, which ranks as the largest IBD, with about 13,500 representatives, has a total of 43 regulatory events reported.

But there are small firms that, comparatively speaking, rack up a sizable number of regulatory problems.

National Securities Corp., which has 594 reps, has 54 events reported. The firm declined to comment.

In fairness, compliance costs can run high for broker-dealers and prove a particular stumbling block for smaller independent broker-dealers.

“It can become very hard financially for some independent firms to stay in compliance,” said Howard Spindel, an industry consultant and senior managing director at Integrated Management Solutions USA.


Commonwealth's most recent regulatory run-in involved the sale of nontraded real estate investment trusts after Massachusetts' head regulator, Secretary of the Commonwealth William Galvin, set his sights on the investments.

It was one of six independent broker-dealers that in aggregate agreed to pay $21.6 million in restitution to clients over issues related to improper allocation amounts of such investments in client portfolios, according to an InvestmentNews report.

And the firms collectively have forked over nearly $1.5 million in fines.

Commonwealth's share was $2.6 million in restitution and a $300,000 fine.

For its part, Cambridge avoided getting tangled up in Mr. Galvin's nontraded-REIT sweep, despite offering the investments to its clients.

The products represent a relatively small part of the firm's business, Ms. Webber said.

“We have someone here look at every one of those transactions,” she said. “But if you're doing a high volume, it's harder to avoid human error.”


Larry Papike, president of industry recruiting firm Cross-Search, pointed to the importance of supervising advisers, who can be scattered across the country, as another key to avoiding regulatory run-ins.

“After you bring in quality people, you then need to monitor their business on the back end,” he said.

“The bigger firms have regional supervision. They have staff that goes into offices on a regular basis so they know what they're doing,” Mr. Papike said.

Cambridge does exactly that.

The firm still structures itself with offices of supervisory jurisdiction, Ms. Webber said.

“I know some [firms] are moving away from it, but we still believe in that structure,” she said.

Industry experts also agree that while regulations can be burdensome for both independent broker-dealers, which are supervised by Finra, and registered investment advisers, which are overseen by the Securities and Exchange Commission, the broker-dealer rules seem to be more cumbersome.

Cambridge has independent RIAs that have been in business for 20 years, and “last year had the SEC show up at their door for the very first time,” Ms. Webber said.

Without question, regulatory requirements can be a thorn in the side of IBDs.

“It's a complex environment and is changing now more than ever,” Ms. Webber said. “It would be nice if we could take a step back and create more-effective regulations instead of just adding more-difficult regulations.”

Sarah O'Brien is a freelance writer in Hampstead, Md.


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