FSI wants SEC to change its privacy rule

NEW YORK — Looking to de-fuse a potential time bomb for
independent-contractor broker-dealers, the Financial Services Institute Inc. wants the Securities and Exchange Commission to change its privacy rule.
Known as Regulation S-P, the rule generally bars brokers and
broker-dealers from providing client information to unaffiliated third parties.
In a briefing to its members last month, the Atlanta-based FSI took square aim at the SEC’s recent inquiries into Regulation S-P issues.
“According to the SEC staff’s enforcement position, when representatives are making preparations for clients’ account transfers, sharing client information with the new brokerage firm without each client’s prior consent” is a violation, according to the member briefing.
“The SEC staff’s approach would, in reality, be too cumbersome, too costly and too time-
consuming, and cause further delays in the account transfer process,” the briefing concluded.
The SEC’s pursuit of a Regulation S-P case, the first of its kind, against NEXT Financial Group Inc. of Houston has galvanized the issue for independent-contractor broker-dealers (InvestmentNews, March 25). In February, the SEC told NEXT that it intended to file charges related to the firm’s practice of instructing broker recruits to provide customer information in anticipation of a move.
The SEC was looking at similar cases against as many as a dozen firms, industry attorneys said at the time.
Seeking a meeting
“This investigation has broad implications” for the industry, said Dale Brown, chief executive and executive director of the FSI,
an industry trade group for independent-contractor broker-dealers and their affiliated advisers.
The FSI is in the process of getting a meeting scheduled with the SEC to discuss the matter, he said. However, approaching the SEC during an investigation of a broker-dealer is “tricky,” Mr. Brown added.
The SEC won’t talk about a specific matter, such as an investigation into one firm, nor should it, he said. The goal of a meeting with SEC officials is to discuss Regulation S-P in the context of policy, Mr. Brown said.
“We think there are a lot of problems with [the SEC’s] approach,” he said. Mr. Brown added that the FSI’s recommendation to alter Regulation S-P is “conceptual” at this point “but not on paper.”
The SEC didn’t make a source available by press time.
The FSI outlined its argument concerning the current Regulation S-P in a briefing to its members April 17.
The SEC’s thinking on the issues simply is full of holes, according to the FSI’s analysis. “Policymakers on these issues must bear in mind the context for client account transfers when representatives change firms,” according to the member briefing.
Because reps affiliated with independent-contractor broker-dealers often operate alone in their branches, they truly don’t carry client information if they decide to change their broker-dealer, the FSI said.
“When representatives change firms, they do not ‘take’ anything — the client information is already in the representatives’ possession,” according to the briefing.
Changing broker-dealers
“In these settings, representatives are simply changing the
broker-dealer through whom the securities business will be conducted, the firm name on their door, business card, letterhead, etc., and where their clients’ accounts will be held,” the briefing said.
Wirehouse reps often work in branch offices, so when a rep leaves, accounts simply can be passed to another broker in the same location. That isn’t the case with many independent-contractor reps, according to the FSI.
“Indeed, in many small branches in small towns serving less-populated parts of the country, there are no other local representatives of the current broker-dealer to whom the clients’ accounts can be reassigned,” the FSI argued in the briefing.
And in order to serve their clients in the best manner, independent reps need to be free to choose with whom they work, the FSI argued.
“Reps often change firms to obtain better service or lower costs for their clients,” the member briefing stated. “In the face of the additional account-transfer-related costs and effort created by the SEC’s staff’s approach, many representatives will decline to put their clients through the whole ordeal, even if their customers would be better served by a different firm at a lower cost.”