Brokers who work as independent contractors are complaining about rising compliance fees. The fees stem from a growing mandate by regulators for indie Firms to subject more offices to surprise audits.
The inspection mandate stems from a broad failure-to-supervise action the SEC took against Royal Alliance in January 1997. The agency said then that it had grave doubts about the supervision of independent contractor offices, and suggested that independent firms perform more office inspections and create regional management structures. The SECs concerns resulted in a May NASD Notice to Members, No.98-38, which required by the beginning of September that broker/dealers adopt a regular schedule for inspecting non OSJ offices. While OSJs must be inspected at least annually under current NASD rules, non-OSJ unregistered offices have no such requirement. These are offices typically staffed by lone independent contractors. Broker/dealers must now make scheduled visits, although no frequency is specified. Unannounced visits may be appropriate, the NASD warns, especially when theres evidence of a problem.
Its the cost of these visits that have some independent contractor reps complaining. Some say theyre being asked to pay for this added burden. One independent rep says he has seen his monthly fees skyrocket to $600 a month from $300 over the past three years.
The firms say the extra charges are because of the SEC inspections, but I think its basically become a profit center for smaller firms, he says.
Some of the larger independent firms such as Financial Network Investment Corp. of Torrance, Calif., have kept their fees steady. The only fees we charge are for licensing and E&O, says Jacki Figliola, executive vice president at FNIC. We are comfortable maintaining these fees because we saw the SEC mandate coming and felt it was going to be an issue. She says the firm had put in place a management oversight system with regional directors that makes the supervisory process less cumbersome.
But some of the smaller firms cant afford the added cost. I feel its the big elephants trying to stomp on the little guy, says John Sprenkle, principal of Sprenkle Financial Services in York, Pa. The NASD is made up of the big wirehouses. And this may be a convenient way for them to stem the competition.
An NASD spokesperson says thats not the case. But the regulators clearly arent cornfortable with the way some independent contractors are operating. Independent offices entail greater supervisory challenges, the NASDR says in its notice, adding that the SEC requires independent contractors to meet the same high standards of supervision as at rnore traditionally organized firms. Both the SEC and the NASD have pushed indie firms to beef up compliance staffs. The NASD notice says independent dealers should consider whether the number and location of its registered principals provides the capability to supervise effectively. The SRO reiterates in the notice that it will analyze supervisory capability in approving new offices.
It all comes down to everyone taking advantage of this extra SEC requirement to nickel and dime us, says the independent rep, who declined to give his name. Why? He is joining a larger firm where such costs arent as much of an issue.