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Dodd-Frank Fallout

Dodd-Frank Fallout

Will smaller broker-dealers survive?

While the Dodd-Frank Wall Street Reform and Consumer Protection Act will ultimately result in a benefit to consumers, it is something of an albatross for smaller broker/dealers already faced with the increased regulatory standards and rising costs of today's financial environment. Some broker-dealers will find it difficult not only to remain in compliance, but to stay in business at all. And many of these firms have been in business with clean records for more than 20 years.

“This is perilous compliance territory,” says Lisa Roth, CEO of Keystone Capital Corp., a retail and institutional brokerage in San Diego. “Changing rules result in a lot of misunderstanding and ambiguity. It will take time and a good amount of revision to the new laws until they are logical and fully functional.”

Here are some of the specific challenges for broker/dealers posed by Dodd-Frank and other new regulations:

Changing FINRA rulebook

The new regulatory landscape created by FINRA's changing rulebook, which is partly the result of the Bernie Madoff scandal, impedes broker/dealers' ability to remain in compliance. Sometimes even the smallest nuances in the rulebook can have major repercussions for the broker/dealer. In some cases, changes mean that business transactions that were once 100 percent by the book suddenly are no longer compliant. In several instances, according to Roth, FINRA has assessed the risks associated with particular products after receiving significant customer complaints, and determined industry compliance standards in hindsight. To respond to the changing rules, broker/dealers have to prove the exact timing of particular transactions in order to prove they were compliant under the set of rules in place at the time of the transactions. This is confusing, time-consuming and often expensive for broker/dealers who suddenly are forced to change the way they've been doing legitimate business for many years.

Fiduciary standard

It's no secret that the financial community is divided in its opinion about whether to extend to brokers the fiduciary duty that now applies to investment advisers. Many insurance company broker-dealers may no longer be able to survive if the fiduciary standard is extended to their representatives. This is because many insurance company broker/dealers with captive agents simply do not have the diversity of product lines necessary to comply with a fiduciary standard.

Expanded authority of regulators and agencies

Dodd-Frank expanded the authority of state regulators, raising the threshold for state jurisdiction of investment advisors to assets under management of less than $100 million, from the previous level of under $25 million. The issue with expanding state regulatory authority is that states don't have a compliance oversight plan for audits. For broker/dealers with smaller compliance staffs and advisors registered in multiple states, regulating those advisors using different sets of rules is a daunting task.

PCAOB-expanded authority

Dodd-Frank also mandates that all broker-dealers must now be audited by a “PCAOB” (Public Company Accounting and Oversight Board)-registered audit firm, creating yet an additional expense for broker/dealers. Using a PCAOB-registered firm is costly. For smaller firms, this can be the difference between paying $2,200 and $10,000 for an annual audit. And for firms in more remote areas of the country, PCAOB-registered auditors can be scarce to non-existent, driving costs up even more.

Increased SIPC assessment fees

In 2009, as a direct result of the Bernie Madoff and other scandals, the Security Investor Protection Corp. (SIPC) increased its assessment fees, implementing a new fee schedule of 0.25 percent of net operating revenue, a switch from its original $150 flat fee. Large and small broker/dealers alike have struggled with the exponentially increased fees, especially difficult when first implemented in 2009 when revenues were down. Many companies are in fact still recovering from the initial blow they received in 2009.

Nebulous jurisdiction of investment advisors

With three different alternatives on the table for strengthening oversight of investment advisors, the industry is left somewhat in a lurch. Broker-dealers need to be able to prepare for a single set of laws so that they can put solid and longstanding processes and systems in place to remain in compliance. The current ambiguity makes it extraordinarily difficult for broker/dealers to anticipate whether legitimate actions today can put them out of business tomorrow should the rules change. Keeping up with and ensuring compliance of even just the current regulations can be a full-time job even for a fully staffed compliance team, and many smaller broker-dealers simply do not have that kind of staff.

What's a broker-dealer to do?

Large firms may have the luxury of building robust compliance and operations staffs that are equipped to evaluate new policies and implement appropriate procedures in response to changing regulations. Yet smaller firms without that kind of staffing may be unequipped to handle a high volume of regulatory changes, and may suddenly fall out of compliance, without even knowing which rulebook to follow to determine an appropriate solution. Industry trade associations often offer support and education on the issues. Associations such as the Third Party Marketers Association (3PM), the Financial Services Institute (FSI) and the National Association of Independent Broker Dealers (NAIBD) can be extremely helpful allies, and in turn, need solid membership bases behind them to achieve their goals. Broker-dealers need not feel completely alone in navigating through today's difficult and changing environment.

Still, for the smaller broker/dealer, increased regulation and rising fees may make it difficult to stay in business. We are finding that for many, the struggle created by new regulations can tip the risk/reward equation too far off the charts. In some cases, it may mean selling assets and/or becoming an OSJ at a larger firm and transferring the burden of compliance. The changing landscape for broker/dealers means that increasingly, firms may need to evaluate their alternatives.


Jodie Papike is the executive vice president of Cross-Search, a third-party, independent broker-dealer advisor and executive placement firm. Cross-Search consults with financial advisors transitioning to independent broker-dealers, leveraging due diligence on over 100 independent broker-dealers. The firm acts as a concierge to financial advisors in transition, guiding them through the entire process of identifying their most appropriate options, negotiating a deal, and transitioning clients. For more information, please visit

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