Indie firms seek guidance on client information

NEW YORK — Regulators continue to leave independent-contractor broker-dealers in the lurch over the tricky issue of how brokers can use clients’ private information when moving accounts to a new firm. The Financial Services Institute Inc. is pressing the Securities and Exchange Commission for suitable guidance on privacy rules for broker-dealers to help them solve the big problem of how to recruit without breaking rules or regulations, specifically Regulation S-P. The FSI and the SEC have batted the privacy issue back and forth over the past few months. The SEC’s division of market regulation “has a proposal floating internally,” said David Bellaire, general counsel with the Atlanta-based FSI. In May, SEC officials described the proposal as similar to the “protocol for broker recruiting” to which many Wall Street wirehouses have agreed, he said. In 2004, major wirehouses put a protocol in place that allows brokers to leave a firm with a limited amount of client information without fear of litigation. The SEC originally promised the FSI guidance on the issue by the end of the summer, but progress has been slow, Mr. Bellaire said. By early last month, the FSI “told them that wouldn’t work for the independent channel,” he said. “In the independent world, there’s no effective way of limiting the information that a rep has,” he said. When an independent-contractor representative leaves one broker-dealer and becomes affiliated with another, “rather than change an office location, he changes signage,” Mr. Bellaire said. At that time, “the SEC indicated a willingness to talk to us about the proposal,” he said. “We haven’t heard back from them.” Falling short The FSI started calling the SEC again about this issue this month. By press time, SEC spokesman John Nester hadn’t returned a phone call seeking comment.
Meanwhile, the Financial Industry Regulatory Authority of New York and Washington on Aug. 13 offered some guidance about the issue in a notice to members. But that notice fell short of what many in the independent-contractor-brokerage industry were hoping for, industry lawyers said. “We’re all waiting for better guidance,” said Amy Webber, chief operating officer at Cambridge Investment Research Inc. of Fairfield, Iowa. She said that regulators are most concerned about two pieces of “non-public” information: the client’s date of birth and Social Security number. An official with FINRA, however, stressed that the notice gives clear guidance about a broker-dealer’s responsibility to learn the identities of mutual funds and variable annuities when recruiting reps. The notice focuses on “not who owns” the mutual funds or variable annuities, “but is the fund portable?” said Marc Menchel, FINRA’s executive vice president and general counsel for regulation. Asked about the issue of private information that is vexing independent firms when recruiting, he said, “We can’t interpret federal securities laws.” Mr. Menchel added, however, that “federal securities laws are not fashioned for the independent model.” The issue over a client’s private information has been brewing for almost two years. The SEC has pursued a first-of-its-kind privacy case against NEXT Financial Group Inc. of Houston, one of the fastest-growing independent-contractor firms over the past five years (InvestmentNews, March 26). The SEC has investigated similar cases against as many as a dozen other firms. Reg S-P is the securities’ industry’s adoption of stricter privacy laws under the Gramm-Leach-Bliley Act of 2000 to protect client information. According to the SEC, “under the Gramm-Leach-Bliley Act, a financial institution must provide its customers with a notice of its privacy policies and practices, and must not disclose non-public personal information about a consumer to non-affiliated third parties.” That holds true “unless the institution provides certain information to the consumer, and the consumer has not elected to opt out of the disclosure,” according to the SEC. Costly recruiting Cambridge’s Ms. Webber said that many broker-dealers stopped taking such client information last year and that the uncertainty of the privacy rule “makes recruiting more costly.” Meanwhile, NEXT Financial hasn’t had any recent update from the SEC about a potential case, said Gordon D’Angelo, the Virginia Beach, Va.-based chairman and chief executive of NEXT Financial Group Holding Co. NEXT Financial has never had any customer or client complaints about the issue, he said. “We haven’t heard a thing from the SEC,” Mr. D’Angelo said. “We think that the SEC is taking a long look before making any comment.”