NEW YORK — After spending the past three years cozying up to securities regulators at NASD,
independent-contractor broker-dealers are fearful that state regulators pose an increasing threat.
The Financial Services Institute Inc. of Atlanta, a trade group representing independent-contractor broker-dealers and their affiliated representatives, is “dedicating more and more resources to tracking issues at the state level,” said David Bellaire, general counsel and director of government affairs with the FSI.
State regulators are “a growing concern,” he said. “You just see more and more activity at the state level.”
Indeed, state regulators are backing away from industrywide sweeps of firms and focusing much more closely on the “individual level,” said Neal Sullivan, a partner with Boston-based Bingham McCutchen LLP.
He characterized the regulators’ efforts as “nothing unusual but more [than in the past].”
States regulators are working very closely with the Securities and Exchange Commission, particularly on matters involving point-of-sale disclosure and elderly clients, Mr. Sullivan said.
Although regulators from Massachusetts, Connecticut, Florida, Texas and Alabama typically have been very active in enforcement, regulators from another state are likely to get more involved, he said.
“I think you’re going to see California get more active,” Mr. Sullivan said.
He said he isn’t sure why, but he is “clearly seeing it.”
Officials from the California Department of Corporations in Sacramento could not be reached for comment by press time.
“There’s no question in my mind that states will be very focused on point-of-sale issues,” he added. “For the FSI and its members, that’s the lion’s share of their business.”
If state regulators are looking at point-of-sale and suitability issues for broker-dealers, that could translate into more issues regarding supervision of affiliated reps and branch offices, Mr. Sullivan said.
When the FSI, an offshoot of the Denver-based Financial Planning Association, got started in 2004, one of its primary goals was to meet with and educate regulators at NASD.
After a series of meetings with NASD officials, the FSI clearly has made inroads with the Washington self-regulatory organization.
Mary Schapiro, now NASD chairman and chief executive, attended the FSI’s annual meeting last year in San Diego and spoke at a closed-door meeting with
independent-broker-dealer chief executives. The FSI’s current chairman, John Simmers, is a member of the NASD board of governors and hopes to be considered for a seat on the board of the entity soon to be created by the merger of NASD Regulation and the
New York Stock Exchange’s regulation group (see One on One, Page 26).
Unique problem
But the states pose a unique problem, in large part “because there’s 50 of them,” said the FSI’s Mr. Bellaire.
Independent-contractor and franchise firms face a potential set of problems, because reps often far flung, one regulator said.
“We’ve seen more compliance issues that arise because [offices] are remote from the compliance central,” said Joseph P. Borg,
president of the North American Securities Administrators Association Inc. of Washington and director of the Alabama Securities Commission.
Those issues include record keeping, and keeping complaints and contracts filed, he said, adding that regulators are not treating independent firms “with a hard stick.”
One issue for independent contractor broker-dealers is how state regulators are regarding a group of investments known as direct-participation investment programs (InvestmentNews, Dec. 4). NASAA has set its sights on making publicly registered non-traded real estate investment trusts and other so-called direct-participation programs less accessible to retail class investors by raising suitability standards.
Such an emphasis worries some industry executives. “I’m concerned that regulators will decide that they know best about what investors can invest in,” said Jeff Auld, chief executive of Berthel Fisher & Company Financial Services Inc. of Marion, Iowa.
