by The SIPA Opinion

The recent release by FINRA  to allow an all public arbitration system is apparently either the last step to allow the hounds known as the Bar association to completely conquer the brokerage industry or a last ditch effort by FINRA and the largest firms on the street to avoid some of the largest potential class-action suits the Street has ever known in light of the sub prime burnout.  But the effect is uniformly negative for registered persons everywhere.

Washington, DC — The Financial Industry Regulatory Authority (FINRA) will launch a two-year pilot program later this fall that will allow some investors making arbitration claims to choose a panel made up of three public arbitrators instead of two public arbitrators and one non-public arbitrator, as is currently the norm.

Six firms — Merrill Lynch, Citigroup Global Markets, UBS, Wachovia Securities, Morgan Stanley and Charles Schwab — have volunteered to participate in the pilot program. The pilot will be available to eligible claims filed on or after October 6, 2008. FINRA is also reaching out to a wide range of other firms to join the pilot so that a variety of firm sizes and business models will be represented.

“This pilot will give investors greater choice when selecting an arbitration panel,” said FINRA CEO Mary Schapiro. “Additionally, this program will allow us to see if a change in the way arbitration panels are selected is a better way to serve and protect the interests of investors.”

The SIPA view is that there needs to be an open system in which both Plaintiffs and Firms have the RIGHT to have a dispute heard by either an arbitration panel or by a Court of law.  The time has come to offer options to both sides not just one.

For years FINRA has argued that the value of Arbitration proceedings over  court of law is, among other things, that in an arbitration proceeding, there would be at least one panelist that has Securities Industry experience.  It was argued that a Circuit Judge in New York city would have no idea what a derivative was or why an option was not exercised, thus compromising the defense of a Broker accused of dastardly deeds.

But the premise of the new pilot plan stands in stark contrast to that argument.  It now proposes that three “Public Arbitrators” with no securities or legal experience whatsoever is somehow better then going before a single Judge without securities experience.  At least the Judge has a law degree and  countless hours of experience behind him when rendering a decision.  The public arbitrators can be retired farmers from South Dakota with absolutely no law experience, save for the 10 hour on line course in mediation he signed up for!

This Pilot Plan is nothing more then a flawed attempt to keep the attack dog attorneys who sue big brokers on a frivolous basis at bay. By keeping the arbitration process, potential cases are kept out of the court system where class action style suits are possible. And while it is absolutely necessary to take action to stem the tide of frivolous lawsuits by opportunistic lawyers, this plan goes too far.  Why should a decent broker who is being falsely accused of fraud have to stand before some retired bean farmer from Arkansas and educate him on what SUITABILITY and NEW ACCOUNT CARDS are?

Trial attorneys will certainly benefit from naive and inexperienced Arbitrators who are unfamiliar with FINRA and SEC rules and regulations.  They will put on a nice suit, flash that million dollar smile and tell a horrid stories that the Panelists, without the benefit of subject matter expertise, will assume true.   And the Bulge Bracket firms, who can afford the best of the best to represent them, will stand toe-to -toe. But what about the individuals whos’ reputations and jobs are at stake?  Will the Bulge Brackets hire those same attorneys to protect their Advisors? Their Independents? Could small firms even afford it?

Once again the individual stock broker will suffer and many decent and innocent Brokers will be forced out of the industry due to ignorance and inexperience of three public arbitrators.  The time to act is now. Silence is agreement!  Let your voice be heard or the next time you may find yourself facing huge fines and expulsions from the industry while FINRA quietly plays the fiddle.

Please forward this link to several other registered persons. Your voice is important. Comment Below!

While Minimizing Risk To Your Client, Your Firm and Yourself

It’s no secret that investment commitments in private equity have gone ballistic over the last few years. And rather than crashing and burning, as many expected was just about to happen, and despite a lackluster market, commitments continue to hit all-time record levels.

Advisors are becoming increasingly involved in private deals. Reasons include a diminishing commission environment, the lackluster real estate market, remembrance of bubble days, and the largest transfer of wealth in history. Client demand is at an all time high; with baby boomers contributing an increasing allocation to deals where they can feel that they are real stakeholders – and if the deal is green, all the better. Advisors with a reputation for getting deals done are becoming hot commodities. 

But this all creates a dangerous situation – both for the Advisors wading into this business and for their firms. Deals in this space have often been done in the shadows of the Old Boy network – and access to quality deal flow has always been an issue. Unregistered gray area finders have complicated the situation. Until very recently, it was still the belief of many reps that all the good deals are spoken for – and as for all the others, well, you wouldn’t touch them with a barge pole. And while there may have been some truth to the myth, it is certainly less true today than ever before. But that sort of thinking was just how the Old Boyz wanted the industry to think.

But then came the PPX  (www.ppxonline.com) – the first  electronic platform introducing entrepreneurs to funding sources while embracing the role of Financial Professionals. Suddenly, Advisors had access to quality products, on their terms, at their convenience. And the gray area finders had no access (they are not allowed to be members). Suddenly the playing field had changed. Advisors found that even the quality deals take time to arrange  – and were able to find deals custom suited to the investment objectives of clients.

But this has created a raft of new concerns. As Advisors are taking an increased interest in Private Deals, there are concerns that the deals be handled correctly, and that the brokerage firm maintain compliance at all times. Though the PPX is designed not to increase the compliance burden on investment firms or entrepreneurs,  these concerns are real – as many firms had not adequately updated their supervisory procedures with regard to private transactions, and specifically outside business activities and selling away.

Indeed, since many firms had not previously engaged in these transactions in a meaningful way, there was confusion at the firm level. Often the firm simply made the choice not to engage in these activities, since it didn’t really understand them. The NASD even put out a special bulletin regarding the necessity for compliance with the relevant regs, and has created some video tutorials regarding the salient issues. But the fact is compliance with the regs is not terribly difficult – despite the perceived difficulty. Many firms have wisely ramped up procedures to make sure that these issues are fully covered. And those firms are supporting their reps, and taking in new business. The growth of the PPX is a clear indicator of this.

But what is the bottom line to compliance in this space? At the individual Advisor level – and that is what this article is concerned with -  the burden is not onerously heavy, despite the old fears. It all comes down to notification and documentation.

As a registered rep, you MUST notify your firm of all “Outside Business Activity”. This goes from selling cars to breeding cats; whatever it is, even if you are NOT being compensated, you must notify your firm. But to be safe don’t stop there; get something in writing from the firm acknowledging your activity.  But there is a more serious issue; the dread “Selling Away” violation. You will be deemed to have engaged in Selling Away if you engage in any securities transaction (whether paid or not) OR any transaction that is contrary to the interest of your firm. As a rep you might think this is not fair; essentially the firm gets a right to veto your participation in any business that it sees as contrary to the interest of the firm – even if you are not getting paid. Well, that’s exactly what it is, and get used to it. In the same way that if you ran a business, you would want to know what else your employees were doing. In any event,  the solution is simple: notify and document. Let your firm know in advance in writing  that you plan to engage in an activity. Then, get acknowledgement back from the firm. And if your firm refuses, well there you have it. Better to find out now than to risk compliance nightmares downstream. 

Sound Easy? It is! Of course, common sense would dictate getting approval in writing – but in case it seems more trouble than it is worth, keep in mind this is a FINRA requirment, and even though it is easy to comply, failure to do so brings draconian punishments. Be on the safe side: always notify and get documentation to protect yourself, your firm and your client downstream. This is not to say your firm will automatically approve; and your firm may have procedures in place that are more restrictive than those required by the FINRA. But times are changing. More firms are expanding this line of business than at any time in the past. So do your homework; get it in writing.  Make yourself secure.  And be your client’s Hero.  Food for thought: how many of your clients have a project for which they would like to raise capital?

Note* Most firms have boilerplate notification forms. If not, tell them they should get one; makes life easier. Check into the PPX’s “Document Library” for a free boilerplate version to download. But consult with qualified legal counsel prior to use.

The PPX (www.ppxonline.com) is a web based set of tools designed to facilitate capital formation.  It enables Advisors to access private dealfow. Membership is free to qualified individuals. If you have been visiting another planet and are not a member yet, now would be a good time to sign up.

Though It May Not Be The Best Solution

SIPA Members often ask for any information we might have regarding the relative merits of “Going Independent” versus staying an employee at a firm. In talking with advisors – be they RRs, IA’s or FPs, a more significant question has emerged. There seems to be a tremendous amount of misinformation out there  - and the question is fundamental to any sort of real consideration of the relevant issues. Recently, we spoke with affiliate company The Broker Dealer Exchange (a company that provides services to those considering the move to independence).  The following is a summary of that conversation.  The question is:

What do YOU mean by “independent”?

Seriously. The reason this question needs considerable thought is that there is a tremendous amount of confusion and uncertainty with regard to the basic scenario faced by most.  Why is there a misunderstanding? Well, this is partly due to the fact that this exercise will typically be a once-in-a-lifetime event – and so, many good folks just don’t have the answers. But complicating matters is the fact that there is basically zero serious coverage of these issues in the popular financial press. Worse, however, is that what is presented is often biased and misleading.  Case in point: when the major magazines talk about independence, the conversation is almost universally confined to the concept of  becoming an independent rep at a bulge bracket or regional firm. While that is an interesting discussion, it is a  far cry from the meaning of independence – that is – no being beholden to anyone – i.e. owning your own Broker Dealer or Financial Advisory.

Think about it – endless articles on “going independent” and next to nothing about running your own firm. The very concept of running your own firm is subtly portrayed as simply out of reach of mere mortals. Advisors are encouraged in the media to consider keeping their own offices, expenses, etc, as an independent rep of a bulge bracket firm  - but are rarely exposed to the concept of owning their own firm. How can this be?  There is bias in the popular press, and it works like this: magazines are run off of advertising and sponsorship dollars. And only the major firms can afford to spend the significant cash involved in a meaningful national ad campaign. And just about every publication realizes this, and acts accordingly. They know exactly where their bread is buttered, and will never give an honest hearing to this issue. Nevertheless, the fact remains:

Owning and operating your own practice (true independence) is likely within your reach.

It may not, however, be the best idea given your particular circumstances. But to set straight the record, filing to create your own broker dealer is burdensome – but not out of reach of mere mortals. And if you out - source the entire process to a compliance consultant specializing in these services (the start up of Broker Dealers) you can expect to pay somewhere between seven to fifteen thousand dollars to get through the process. A lot of money, to be sure, but not out of reach for most successful advisors. Then again, if you wish to Buy an existing Broker Dealer - one that is totally clean and has never done business (yes, this is possible) the cost is somewhere in the range of $50K – but there are ways to do it that would allow you to be in business immediately (in as little as three days), so there can be some reasons for this, depending of circumstances. And what is the amount of capital required? Well this depends on the business you intend to conduct. But the vast majority of FINRA firms are $5K net Cap firms – meaning that the requirement is five thousand dollars. Again, not out of reach. Filing your own investment advisory can be even cheaper. Outsourcing the process at the state level (if you manage less than $25M client dollars) is inexpensive; usually less than $2500. Triple that for SEC registration, if you manage more than $25 Million.

So there you have it; the brass tacks. You may be much closer to owning your own firm than you think. That being said, your circumstances are unique – and owning your own shop may not be the right solution. But you should know that it is a realistic possibility - despite what the major press might have you think. 

For a more in depth discussion of these issues, please visit affiliate company “brokerdealerexchange.com” for a free consultation. Get the facts – so that you can make the appropriate decision based on your relative factors.

The Broker Dealer Exchange is a leading financial services acquisitions intermediary, specializing in buy and sell side advisory in the  purchase/sale of Broker Dealers, Books Of Business, etc. BDX is a neutral third party intermediary, and is distinguished by a staff with real track records in the broker dealer compliance/ financial services space. We are an affiliate, in that we direct requests for purchases of assets or Broker Dealers to the BDX.

Ensure That Your Settlement With A State Regulator Does Not Result In Inadvertent Statutory Disqualification

By Alan Wolper

My son, like most teenage boys, spends his fair share of time (tread that “every waking minute”) devoting himself to achieving higher and higher skill levels in the video games he received for Christmas that make Pac-Man and Asteroids – the games into which I poured my share of quarters way back when – seem as quaint and unsophisticated as an 8-track tape player. For reasons that are unclear to me, perhaps, at their own amusement, the people who program modern games often hide within millions of lines of code “easter eggs”, clever little surprises, such as a new and better weapon, that are revealed, typically, by pressing some complex sequence or combination of buttons. Based on my limited research, it seems that the discovery of such easter eggs is a happy event; indeed, entire websites are devoted to sharing the well hidden locations of easter eggs.

FINRA, unfortunately has a different view of easter eggs. Sadly, buried among the dozens and dozens of pages of the July 2007 amendments to NASD’s By-Laws that were necessitated by NASD’s consolidation with NYSE Regulation, is one easter egg that, when accidentally discovered, will not bring a smile to anyone’s face. The amendment in question served to change the definition of ‘Statutory Disqualification.’ As a result of this seemingly modest amendment, which, interestingly, had nothing whatsoever to do with the consolidation, it has become much more difficult for individuals and firms who have been charged with violations of state securities laws to resolve those charges without the need for an evidentiary hearing.

Read the rest HERE

In the financial industry and with today’s competitive world, it is hard enough to make a living. Today with a strict regulatory environment it’s even harder to keep focused on what we do best. We help our clients create and maintain wealth. A lot of firms can’t afford to have the proper Compliance personal and resources to maintain the proper coverage. A few years ago it was not uncommon to have a full staff of compliance officers on hand covering the various aspects of the firms Compliance responsibility.  The reality of today is that even with a staff of 10 compliance examiners there are many holes in most firms Compliance procedures due to ever changing rules and regulations from FINRA, The SEC and now the various State Securities Regulators.

Since Compliance personal do not produce and they are a required expense, it is an area a lot of small firms try to keep to a reasonable cost. When you consider the cost to maintain a full compliance staff and then factor in the occasional Arbitration in which you may lose, the cost for compliance can be astronomical to say the least.  This cost doesn’t?t factor in a FINRA exam and find out your WSP’s (Written Supervisory Procedures) are out of date.  Then have to pay a fine or an outside Counsel to negotiate the possible AWC from FINRA. It is only after a firm experiences the perfect storm described above that we then realize the expense and the loss of focus on our core business, creating wealth for our clients.

In today’s regulatory environment it is hard for Compliance Officers to test their own procedure, that’s why I would highly recommend hiring an outside consultant to review your procedures for you.   An outsider is the right person to do this because they bring in an outside prospective to the table. The Consultant works for you and what they find is discussed and corrected by you.  In many instances I have come to a firm to perform one type of audit only to discover huge deficiencies in other areas that they never even thought of. The Anti Money Laundering Act has created many vague and somewhat grey areas the regulators and firms a like are still not clear on.  Another area a lot of firms neglected to do is an annual update of the New Account form. We all have been through this before during FINRA audits. The FINRA examiner calls you into your conference room and starts to question the various disclosures on your new account form and Margin agreements. What?s even worse is when a Plaintiff’s Attorney requests the client New Account Form and you suddenly realize that it was filled out three and a half years ago! Now it’s too late and the firm is responsible to be aware of the client’s financial condition when it comes to investments. A lot of brokers neglect to do this and this is the number one reason attorney’s win arbitrations due to “Know Your Client”.  I would urge you to seek out a independent set of eyes to review all your procedures and account forms so you can be sure that you?re keeping up with the latest disclosures and rule changes from FINRA.

… And I thought The Merger Was Supposed To Save Money?

Proposed Rule Change to Amend NASD Rule 7001B to Adjust Percentage of Market Data Revenue Shared with FINRA/Nasdaq TRF Participants

Financial Industry Regulatory Authority, Inc. (”FINRA”) (f/k/a National Association of Securities Dealers, Inc. (”NASD”)) is filing with the Securities and Exchange Commission (”SEC” or “Commission”) a proposed rule change to amend NASD Rule 7001B (Securities Transaction Credit) to modify the percentage of New York Stock Exchange (”Tape A”), American Stock Exchange and regional exchange (”Tape B”), and Nasdaq Exchange (”Tape C”) market data revenue shared with FINRA members reporting trades to the NASD/Nasdaq Trade Reporting Facility (the “NASD/Nasdaq TRF”).

The Filing Is HERE

The SIPA’s View: We are very concerned by any additional fees being passed on to members. Member firms received $35,000 checks from FINRA based on projected cost savings from the merger of NYSE and NASD yet less then a year later we are seeing fees being passed on. We believe all new fees should be tabled for no less then three years due to the anticipated cost savings of the Merger that occurred last year. Please Comment.

Proposed Rule Change to Adopt Rule 12905 of the Customer Code and Rule 13905 of the Industry Code to Permit Submissions to Arbitrators After a Case Has Closed Under Limited Circumstances

Financial Industry Regulatory Authority, Inc. (?FINRA?) is filing with the Securities and Exchange Commission a proposed rule change to adopt Rule 12905 of the Code of Arbitration Procedure for Customer Disputes and Rule 13905 of the Code of Arbitration Procedure for Industry Disputes to permit submissions to arbitrators after a case has closed only under the following circumstances: (1) as ordered by a court; (2) at the request of any party within 30 days of service of an award or notice that a matter has been closed, for ministerial matters; or (3) if all parties agree and submit documents within 30 days of service of an award or notice that a matter has been closed.

The Filing Is HERE

THE SIPA’s View:  We Applaud this move and believe that expungement of records that have been wrongly soiled by frivolous suits needs to be pushed harder.  We believe Arbitration is a valuable tool to the financial industry but clearly the rules of Arbitration need to be overhauled.  What do you think?  Please comment.

LET BROKERS AND FINANCIAL ADVISORS  DO THEIR JOBS

There has been a lot of chatter lately regarding mutual funds and the fees associated with them.  Quite frankly, this is nothing new and for years the industry regulators have questioned all the various shares of mutual funds sold and whether customers would have been better served buying A shares, B shares, No load, XY and Z shares ect….This has always been very puzzling to us in that the real suitability factor should rest primarily in the fund itself.  Clearly the cost of any investment should be analyzed, but when it comes to mutual funds it seems there is more emphasis put on the cost of the investment then whether it was the right fund to buy.  Years ago I bought a Japan Fund with very low front end load because  I was led to believe that Japan’s economy was so poor that there was no way they could possibly sink lower and when they did rebound I would be in at the bottom.  Great advice…The fund lost about 60% in two years and ended up shutting down!!!!  As I pondered my 60% loss on a two year investment, I can tell you in all honesty that the last thing that crossed my mind was the ultra low 2.0% fee I paid to get into that Mutual fund!.  I couldn’t believe I had received such bad advice from my financial advisor and every morning when I wake up I have to see that darned fool in the mirror.  This was my blunder, my mistake and my fault for listening to another Industry buddy of mine while tossing back a few cold ones.

I am amazed though that individual investors and regulators spend enormous amounts of time analyzing cost of the fund as the primary measure of suitability.  I would have gladly paid a 10% up front fee if the darned fund had made me 20% over that same two year period instead of going belly up.  This brings me to our central point regarding the fees charged for the various mutual funds out there:  LET BROKERS AND FINANCIAL ADVISORS DO THEIR JOBS!!!

Many Americans succeed at handling their own finances, but many more fail then succeed.  We take so many things for Granted in America.  We assume Gas will stay at 1.00 a gallon for the rest of our life, Our houses will double in price every five years, Bridges that were built 50 years ago will always hold up, and brokers are only their to blame or bail us out when our investments go bad.   Brokers and Financial Advisors serve one of the most valued and underappreciated services in this country:  They help build wealth for Americans and raise capital for American Companies. Unfortunately when things like the dot com blow up happens, we only hear about the poor investors who lost it all because of a few bad brokers.  We take for granted the millions and millions who made MILLIONS AND MILLIONS due to the advice of Brokers and Advisors!  Prior to 1995, I’m willing to bet 90% of America had no idea who YAHOO, AOL, IOMEGA or RAMBUS was, yet these companies made millionaires out of so many Americans due to the advice of Brokers and Advisors.

Mutual Funds have long been considered a practical approach to picking individual stocks like the ones mentioned above and spreading out risk and reward over a broad cross section, however as illustrated by my  Japan Fund, unless you choose the right one you could lose big time just the same.  Brokers and Advisors provide a valuable service by dissecting the Mutual Fund and its holdings.  They save investors the minutia and time of determining if a fund has too much of one stock or bond in its portfolio.  More importantly they can alert investors to the risks they have in their current fund if global and economic events change.  Brokers receive a fee for this service and deservedly so.  It is their job to make sure the Fund is suitable for the investor and to make sure their exposure to things like sub prime bonds is limited and to make sure they alert their clients that it may be time to redistribute their holdings. All this brings us to the important question regarding 12b-1 fees and whether they should be reduced or eliminated all together?

The answer is simple: LET BROKERS AND FINANCIAL ADVISORS DO THEIR JOBS!!!

Brokers should be rewarded for managing their client’s accounts and in this geopolitical climate, Brokers and Advisors service and expertise is needed more then ever.  We believe that a broker who is receiving continued trails has a vested interest in his client and will continue to call and service their client’s investment needs.  It is our belief that if 12b-1 fees were eliminated, there would be very little contact with clients after the initial purchase and many clients would be financially harmed.  In addition, we are also fearful that many brokers would turn away from mutual funds and start trying to pick individual stocks that will yield a higher commission both in and out of the investment.  This could be a recipe for financial disaster in America in our opinion.  Although talented and dedicated, Brokers and Financial Advisors work based on commissions.  They are no different then a Doctor who truly believes in what he is doing and is dedicated to his profession and helping others.  If a Doctor in the United States had his hourly fee capped at say $25.00 per hour we would basically have the same medical care status as Mexico because all quality Doctors would move to other countries that will pay for their service.  Brokers and Financial Advisers are no different and if 12b-1 fees are significantly changed many will turn to other vehicles which may not provide the safety and growth of a mutual fund.  Mutual funds have helped fuel the economy, the stock market and the retirement accounts of Millions of Americans.  We believe now is not the time to micro manage the fees paid to the industry.  With a failing Economy, Wars, Sub prime housing blow up, Oil approaching $5.00 per gallon, now more then ever we need Brokers and Financial Advisor’s reviewing mutual fund holdings, risks, and exposure to the world we are currently living in.  Right now more then ever we have to LET BROKERS AND FINANCIAL ADVISORS DO THEIR JOBS…. And be compensated for it

FINRA has notified its members of a special election to fill the vacant seat on the FINRA board of Governors. 

While the SIPA does not wish to engage in an active election campaign, we would like to put forth a notion that has been oddly missing from the Board of Governors since its inception:  Who is representing the individual Broker’s interest on the board?  Clearly there is something wrong with a system that will put 11 public governors from various walks of life like University Professors and lawyers from large law firms, yet not one single Governor is just a good producing individual from a broker dealer. 

We would propose that 3 registered reps from three different sized firms should be on the Board of governors to ensure the rights and interests of individual brokers are being met. 

There are nearly 800, 000 Registered reps in the USA, yet there is not a single seat devoted just to them. 

Registered reps account for 99% of the professional community, yet they have absolutely no say at the most important level.  How can that be in this day and age of fairness and equality?  Even South Africa realized it was insane to have 10% of the country’s population dictate the livelihood of the other 90% so why can’t we do the same at the Board of Governor level? 

Clearly there would be some resistance to this concept because in the bluntest sense both large firms and small often view brokers as cattle.  Cattle are fattened up then sold at auction for profit.  Our industry has little regard for individual brokers unless of course there is capital to be raised or a stock or mutual fund that needs to be pitched.  We are at a critical crossroads in the Financial Industry and we believe now is the time for more openness and communication from ALL participants in the Financial Industry, not just the elite owners and Directors of FINRA firms.  Brokers are vital to our industry and our economy and need to have a voice at the Board level.  Make this a Special election and give Brokers a true voice out the Board level so their concerns can be heard.

FINRA to Conduct Special Election to Fill Vacant Board Seat

Washington, DC — The Financial Industry Regulatory Authority (FINRA) announced today that Richard L. Goble, a member of the FINRA Board of Governors, has resigned, effective immediately. FINRA will conduct a special election to fill Mr. Goble’s seat. Details of that election will be announced soon.

Mr. Goble had been a member of FINRA’s Board since last October after being elected by small firms as one of their three designated representatives.

FINRA is overseen by a 23-person Board of Governors, with 11 seats held by Public Governors and 10 Industry Governors. FINRA’s CEO and Chairman comprise the remaining two seats. Large firms, consisting of 500 or more registered persons, and small firms, consisting of 150 registered persons or fewer, are each guaranteed three seats on Board. Medium-sized firms with 151 to 499 registered persons, NYSE floor members, independent dealer/insurance-affiliated firms and investment companies are each guaranteed one seat.

By Karen Fischer

In the current regulatory environment your financial record keeping is now a full time job. 10 years ago all that was really required to be a firm’s FINOP was some accounting experience and a series 27.  But that was then, and this is now. The events of 9-11 and the resulting AML and Patriot Act legislation have radically increased the role the FINOP plays.  In addition, massive accounting fiascos at companies like ENRON, WCOM and Arthur Anderson has created a vacuum of regulatory requirements on Firm’s and their FINOP’s. The demands on your FINOP go way beyond creating financial statements and filing a FOCUS report. Besides knowing how to produce a Balance Sheet and Income Statement, FINOPS need to be able to determine what assets are “allowable” or “non allowable and what liabilities are or are not “aggregate indebtedness”. FINOPS need to understand and anticipate what effect foreign securities and foreign currencies will have on the firm’s net capital in order to comply with the Sarbanes-Oxley Rules, Anti Money Laundering rules, and the Privacy Act affecting your customer account record keeping. The net capital rules have become complex, and with the merger of FINRA and the NYSE constantly changing. A Financial and Operations principal needs to be able to prepare for and supervise a Finra, SEC, and State audit, supervise the firm’s annual certified audit, and supervise the firms AML audit. It’s a tall order and Firms and FINOPS are feeling the effects.

Compliance has expanded to affect every part of the  securities business, particularly the Financial and Operations side. In an increasingly complex regulatory environment, many firms are reporting heightened reliance on the advice of experienced Financial and Operations Principals, not only to prepare all the requisite reports and keep the filings current and correct – but advise in the regular course of business in order to be sure that you are not violating any securities laws.  Many broker dealers have turned to outsourcing not only as their primary source for quality Financial and Operations expertise, but for supplemental advice as well.  One of the best ways to ensure your firm is keeping up with the changing regulatory times is to have an outside and truly independent accounting team come in and review the work that your in house staff is conducting.

Make no mistake the additional regulatory burden does add cost to the running of the Broker Dealer. But it is important to keep in mind that we live in changing times. While the perception may be that these added costs are unnecessary and onerous, it well to remember the “ounce of prevention” adage. Thoughtful planning and consideration of these issues in advance helps firms mitigate these costs and avoid the devastation that can come from a lack of appreciation of the new regulatory environment. Better to handle these issues on your own terms, at a time of your choosing – rather than suffer unplanned events. As the adage goes, an ounce of prevention is always better than a pound of cure. 

Careful planning in advance of problems is the way to go. Though there are up-front costs associated with proactive measures, the benefits of smooth running can far outweigh the alternatives.