WealthManagement Magazine

The Compliance Bind

Arcane rules and overzealous compliance departments are choking off effective communication with clients. More bad news: There's no relief in sight.Compliance is hurting your clients. No, those corporate compliance examiners aren't sadomasochists. Nor do they derive some sick sort of pleasure out of sanitizing your client newsletters and preventing you from communicating with customers. And they aren't

Arcane rules and overzealous compliance departments are choking off effective communication with clients. More bad news: There's no relief in sight.

Compliance is hurting your clients. No, those corporate compliance examiners aren't sadomasochists. Nor do they derive some sick sort of pleasure out of sanitizing your client newsletters and preventing you from communicating with customers. And they aren't morons either.

But they are under an incredible amount of pressure from NASD Regulation to enforce an arcane, almost-incomprehensible set of rules regarding broker communications with the public. And several substantial failure-to-supervise fines have spooked them.

So corporate compliance departments have become painfully overprotective. You've seen the results: Mind-boggling alterations to your marketing materials. Unbearable delays during the compliance screening process.

"What it comes down to is that I can't communicate with my clients," gripes one million-dollar wirehouse producer. In fact, this broker was so frustrated over the constant nitpicking of a corporate compliance department, she stopped publishing her client newsletter altogether.

"My sales assistant was spending over 100 hours on every newsletter haggling with compliance examiners about stupid things like pictures of my staff members and messages about our personal lives," she says. "It's pathetic. I gave up."

Across the country, registered reps like this one who have been through the compliance wringer are simply throwing in the towel, resigned to the fact that they cannot communicate with clients the way other professionals do.

Surely things will change, you say? Rules will be updated for the Internet age? Maybe. The NASD has proposed easing the restraints on using mass communications like e-mail. But the SEC doesn't appear willing to open the gates to efficient client communication.

Communication Breakdown At the core of the regulations governing broker communications with the public is NASDR Conduct Rule 2210, which considers any piece of written correspondence a broker sends to two or more clients as "sales literature."

All sales literature must be screened and scrubbed by the corporate compliance department, and signed by a registered principal. Sometimes, depending on the content, it must also go through the NASDR's own compliance review procedure.

In general, correspondence that contains references to mutual funds, unit investment trusts or annuities, or contains a ranking must be preapproved by the NASDR before distribution. The NASDR usually recommends changes before granting approval, too.

When corporate compliance departments try to interpret these rules, delays often result. In fact, marketing consultant Marty Baird says some of his broker clients have waited as long as six weeks for compliance approval on a letter or marketing piece.

"Now, how timely and topical can that campaign be six weeks later?" he asks. Ultimately, clients suffer from this communications bottleneck, says Baird, founder of Advisor Marketing in Phoenix.

"The stuff they let us send out to clients is so diluted that it's worthless," agrees the wirehouse producer. "There's just no point in sending it out."

Compliance consultant Katherine Vessenes, president of Denver-based Vestment Consulting, says some brokers are waiting nine months for compliance approvals. "I can see why reps are unhappy," she says. "But the problem is that their compliance departments have not done a good job explaining why this is happening."

What's happening is that the rules have become too complicated and the compliance officers have become overzealous. Vessenes offers the example of an NASD examiner who objected to an illustration of gold coins on a seminar invitation because, he reckoned, showing money could be considered promissory.

"In my mind, that's a bit much," Vessenes says. So, don't blame the corporate compliance department. Blame the regulators. "I have never seen a firm compliance department trying to be difficult," Vessenes adds. "What I see them doing is trying to enforce these very specific, arcane regulations."

Relief From Regulators? In October 1999, the NASDR issued Notice to Members 99-79, proposing sweeping changes to the rules governing broker advertising and communication with the public. The NASDR and the SEC are still going back and forth on a revised proposal filed with the SEC this past March.

The NASDR is proposing more liberal distribution of items such as press releases and magazine articles without the NASDR's prior approval. The proposal would lower the compliance hurdles that producers have to jump over to send newsletters, form letters and group e-mails - perfect vehicles for reassuring clients during market fluctuations.

Specifically, the NASDR has proposed eliminating its requirement that form letters and e-mails sent to two or more clients receive the NASDR's and/or firm's preapproval. The rule change would allow a producer to send a form letter or bulk e-mail to as many existing clients as he wants (and up to 25 prospects) within a 30-day period, without the NASDR's pre-use approval and filing requirements kicking in.

"Given the volume of form letters and group e-mails that [brokers] may send, and the speed with which this material can be dispatched to customers, a pre-use approval requirement may be less practical than supervisory procedures that are more specifically tailored to these forms of communications," the NASDR explained in its March submission to the SEC.

The NASDR would still require written policies and procedures for monitoring form letters and e-mails.

"Everybody would win" under such a scheme, Baird says.

But the SEC is not convinced. Joseph Savage, an attorney in the Advertising/Investment Companies Regulation department at the NASDR, says the SEC isn't yet ready to reclassify bulk e-mail as correspondence, which would allow brokers to send such messages without preapproval. So, the NASDR will file an amendment in the "near future" changing the proposal on bulk e-mails, he says.

Savage and the NASDR won't cough up any specifics on how the proposal will be retailored, nor would the SEC comment on the proposal's status.

But it's clear that getting these overly restrictive rules relaxed is as difficult as efficiently communicating with clients.

Time Inc. general counsel Robert McCarthy says the NASD is attempting to censor publishers.

Strict NASDR content and disclaimer requirements are keeping brokers from sharing published information with clients, McCarthy says in an October 1999 comment letter to the NASDR. He says that brokers under pressure to make reprints NASDR-compliant sometimes go so far as to ask the publisher to change the content of the article.

McCarthy's letter recounts one painful experience in particular, when an unspecified brokerage firm submitted for NASDR approval an article from Fortune magazine, called "The Best Mutual Funds For Your Retirement."

"NASDR objected to: 1) the article's only ranking funds with a minimum asset size, 2) the time period representing the ranking, and 3) the title of the article, as well as some of the text. In order for the member to be able to distribute this reprint, Fortune would have had to change the formula of its ranking, as well as the title and text of the article," McCarthy says.

Most reputable publishers, including Time, refuse to edit magazine articles for reprint customers. So brokerage firms typically cancel their reprint orders, and the clients don't get the information.

"The result is that an NASD member cannot pass on information that is already available to the general public," McCarthy says. "In other words, publishers and NASD members are being censored."

If you really want to test your compliance department's sensitivity, insert the word "guarantee" into one of your brochures, says marketing consultant Marty Baird, head of Advisor Marketing in Phoenix.

"Obviously, you can't guarantee performance or returns," Baird says. "But you can guarantee your service. You absolutely can guarantee that you'll return every phone call within 24 hours, and you can guarantee that if your client is not satisfied, you'll help him find a new adviser."

Although there is no regulatory basis for removing such language, some compliance officers will challenge it, Baird says. Go figure.

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