WealthManagement Magazine

What 3012 Hath Wrought

When the NASD released follow-up guidance on Conduct Rule 3012 in April, it aimed to clarify how member firms must supervise the personal business of producing branch managers. Unfortunately many firms particularly independents remain confused about the rule's requirements. Perhaps more important are their concerns about the long-term chilling effect the rule could have on the branch manager employment

When the NASD released follow-up guidance on Conduct Rule 3012 in April, it aimed to clarify how member firms must supervise the personal business of producing branch managers. Unfortunately many firms — particularly independents — remain confused about the rule's requirements.

Perhaps more important are their concerns about the long-term chilling effect the rule could have on the branch manager employment pool.

“3012 makes it clear that the regulators don't like the idea of a producing manager,” says Bill Singer, partner at the New York-based securities law firm Gusrae, Kaplan & Bruno. As a result, he says, firms are likely to discourage managers from producing — a development that could cause a talent runoff. (Singer is a Registered Rep. columnist.)

For independent firms the matter is most pressing, because without the business generated by branch managers, many of their smaller offices would have to close, says Terry Lister, general counsel for the Financial Services Institute (FSI), an Atlanta-based association for indie broker/dealers. Lister has other concerns with the rule, which took effect January 2005: It is “extremely complex,” he says, leaving FSI members “perplexed.”

Rule 3012 has its origins in the bad behavior of a producing BOM named Frank Gruttadauria, who, along with two partners, stole over $40 million from 50 clients of a Lehman Brothers branch in Cleveland. Rule 3012 requires that producing branch managers receive supervision from an “independent” employee of the firm. But Lister says determining “who is independent enough from a producing manager to supervise him” is not simple. Firms often have complex compensation arrangements for producing managers in which “everybody gets overrides on everybody.” This makes it very hard to determine when a firm is running afoul of the rule.

The NASD guidance notes — one in Oct. 2004 and another in April 2005 — have helped a little, as have call-in meetings. But there is still evidence of confusion. Lister said a recent NASD conference call drew more than 1,000 listeners.

“I applaud the NASD for their guidance and call-ins,” Lister says. But if it really wants to clarify 3012, the NASD should remain open to talking about it for a while longer.

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