The SEC's proposed changes to Regulation S-P may slow down recruiting of independent reps, but executives with independent broker-dealers nonetheless are relieved that the agency has given some potential guidance on the issue.
Last Tuesday, the Securities and Exchange Commission proposed modifications to its privacy regulations that would, among other things, allow a departing broker to take customer contact information.
Regulation S-P outlines privacy issues for broker-dealers and registered investment advisers concerning client information.
With one case involving an independent-contractor firm's alleged violations of Regulation S-P before an SEC administrative judge in Houston, the industry has been waiting for direction on the matter (
InvestmentNews, Jan. 14). SEC attorneys in that case, which involves Next Financial Group Inc. of Houston, argued an extremely strict and narrow view of how reps can use client information when they change firms.
The Next Financial case highlights the uncertainty over what information a broker can take without violating privacy rules and policies.
The SEC proposal "would take uncertainty off broker-dealers," said John Hurley, managing director with Suasion Resources Inc., a Roseland, N.J.-based consulting firm for financial services companies.
From the recent Next Financial hearing, at which Mr. Hurley was an expert witness for the firm, the SEC has taken away the lesson that "it's in the customer's best interest for accounts to be moved as quickly as possible."
The SEC's proposed amendment is similar to a protocol to which wirehouses agreed in 2004, and would permit a limited transfer of information. The proposal would permit one firm to disclose to another a customer's name, address, telephone number and e-mail, and also to provide general descriptions of accounts and products held.
Currently, the transfer of customer information is a kind of gray zone, with firms using data from exiting brokers as well as a variety of other methods to fill in gaps.
"This could slow recruiting but make it more predictable," said one industry attorney at a large independent firm, who asked not to be identified. "Now, there's potentially a standard to live with."
"It's a win, compared to where we started," the attorney added.
The Financial Services Institute Inc. of Atlanta was taking the pulse of its members and studying the proposal last Thursday with the intent to form its response, which is due within 60 days of the proposal's publication.
Without commenting on specifics, David Bellaire, the group's general counsel, said: "We are pleased the SEC has moved forward and proposed regulatory relief."
The FSI, which represents independent-contractor broker-dealers and their reps and advisers, has lobbied the SEC on the issue over the past few years, he said. Mr. Bellaire said that one commissioner, Paul Atkins, is particularly aware of the issue's importance to independent firms.
"Commissioner Atkins was tuned in on this issue" at last week's open meeting of the commission, which voted unanimously for the proposed amendments, Mr. Bellaire said.
"It's an improvement over the current situation, with people seeking guidance and clarity," he said. "The question is, does it go far enough?"
Mr. Bellaire added that the FSI recognized that the SEC had two sides of Regulation S-P to consider: the portability of client information and the protection of client data to prevent such perils as identity theft.
Attorneys noted that some independent broker-dealers already have worked to add to or modify their client information policies and procedures, putting them more in line with the practices of wirehouses and the SEC's current proposal.
E-mail Bruce Kelly at [email protected].
