Top Compliance Issues In 2008

If you thought compliance and regulatory scrutiny couldn't get any more intense, welcome to 2008. Consumer protection is expected to be the driving force behind new regulations and enforcement actions in the financial-services industry this year, according to experts at Wolters Kluwer Financial Services, a compliance and risk-management firm in Minneapolis. There are several causes, Wolters Kluer

If you thought compliance and regulatory scrutiny couldn't get any more intense, welcome to 2008. Consumer protection is expected to be the driving force behind new regulations and enforcement actions in the financial-services industry this year, according to experts at Wolters Kluwer Financial Services, a compliance and risk-management firm in Minneapolis.

There are several causes, Wolters Kluer says, including the sub-prime mortgage and credit crisis, growing identity theft and other consumer-related fraud. Then you've got the combined and reorganized NASD and NYSE Regulation (now called the Financial Industry Regulatory Authority, or FINRA), which is eager to show that a non-governmental, self-regulatory body can be effective. On top of all that, you've got a presidential election and, therefore, a more “active” political climate.

We asked several industry insiders where they think the regulators will be clamping down first. They offered the following:

Elder Issues

Protecting investors has become a top priority for regulators as more baby boomers enter retirement, and put “unprecedented amounts of money in motion” says David Thetford, principal securities-compliance analyst for Wolters Kluwer and a former regulator for the NASD. “With so many options for money management and retirement planning, there is a tremendous opportunity for financial abuse — particularly among the elderly,” he says. “Unfortunately, you can't prescribe ethics.”

Since the elderly are often less sophisticated and more fearful about investing, they are “easy prey for predatory advisors,” says Andre Cappon, founding partner of The CBM Group, a New York City-based management-consulting firm specializing in the financial-services industry. “That's certainly nothing new. But branch office managers have to micro-manage their reps to help prevent this.”

The newly formed FINRA has indicated that its new rulebook — to be released in late 2008 or early 2009 — will not rely as heavily on traditional protocols or cut-and-dry rules, Thetford says. That is to say, regulators will be on the lookout for situations that may appear to be in accordance with the letter of the law, but not its spirit. “Many of the rules for advisors will more be principles-based — and a lot more open to interpretation by regulators,” he says. “In other words, it won't be enough for an advisor to insist he's done right by his clients just because he has dotted all the i's and crossed all the t's on a client's account form.”

For example, regulators will be scrutinizing how advisors are marketing themselves, particularly to the elderly, especially when it comes to free-lunch seminars and bogus senior-planning designations. Regulators feel free-lunch seminars put “an undue pressure on attendees to do business afterwards,” says Thetford.

Revenue Growth

With the overturning of “The Merrill Rule” (the broker/dealer exemption) last year, says Chip Roame, managing principal of Tiburon Strategic Advisors, an industry research and consulting firm, BOMs must now supervise their reps even more closely. SEC “Notice to Members 07-06” requires BOMs to take extra measures to supervise newly hired reps in their first few months. “When new hires bring over clients with proprietary investments from the old firm, they'll often try to get them to liquidate them and move the assets to the new firm. But that may not be in the client's best interest. Branch managers must stay on top of all of this,” says Thetford.

And this creates a sticky dilemma, says one wirehouse BOM in the Northeast who asked not to be identified. “The reality is that many BOMs want those assets moved as well.” Branch revenue growth, for branch managers, is “the single greatest potential source of conflicts of interest,” says Roame. “Branch managers are under intense pressure to supervise the business that takes place within their branch while [at the same time] trying to grow the branch and bring on new advisors — particularly high-producing ones.”

Communications With The Public

Communication has been an issue of growing concern over the past few years, and will continue to be important to regulators in the coming year, Thetford predicts. Managers need to pay even closer attention to make sure advisors are following their firms' procedures when it comes to newspaper ads, sales literature, seminars and client correspondence. That's hardly an easy task, says Roame. Still, Thetford insists BOMs need to pre-screen their advisors' seminar scripts and handouts, and know who the attendees are. “They need to stay up on the rules, and have their hands firmly around the flow of information emanating from their branch,” he says. “I recently saw a $7-million investment banking deal collapse simply because a rep sent an email to someone he shouldn't have.”

Says Sue Burt, senior attorney at Wolters Kluwer, “It's very possible that 2008 will mark the beginning of a dramatic shift in regulatory compliance in the financial-services industry. New guidance, enforcement and legislation could very well direct financial institutions to take on a much more active role in helping their customers choose the products and services that best suit their needs.”

It's none to soon for Roame. “It's high time this industry lifts its standards and brings on fiduciary responsibility for all advisors with all clients.”

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