Brokerage firms would not have to supervise work their registered representatives do for unaffiliated registered investment advisers under a Finra proposal released this week.
The
rule would streamline brokerages' obligations for monitoring outside business activities, concentrating them on those that are investment-related and most likely to harm clients.
Under the rule, a rep would have to notify her brokerage in writing of her work at an RIA not related to the firm, and the firm would have to approve it. But the firm would not have to supervise the RIA activities of the broker nor record on its own books the RIA transactions.
The Financial Industry Regulatory Authority Inc. is making the change in RIA oversight as part of a retrospective rule review. The organization said that requiring brokerages to monitor RIA activity was causing headaches for Finra members.
"This approach has caused significant confusion and practical challenges, including, for example, privacy challenges with a member obtaining account information for customers of an unaffiliated IA through which a member's registered person may be acting in an IA capacity," the regulatory notice states. "Given these challenges and in light of the fact that these activities are subject to another regulator regime, some stakeholders argued that the current approach imposes unnecessary burdens without providing meaningful investor protections over the activities."
The proposal was advanced by the Finra board at its December meeting. Over the last few weeks, it has caused
worry among independent broker-dealers that they would lose an important revenue stream if they were no longer compensated for supervision of outside RIA work by their reps.
"IBDs have been charging exorbitant fees for supervisory services that they weren't performing," said Brian Hamburger, president of MarketCounsel. "It is essentially a royalty on the independent RIA business. B-Ds are going to have to get real about delivering bona fide benefits for the way they charge advisers."
Finra is taking public comment on the regulatory notice until April 27.
