Independent registered representatives and their spouses soon could face unprecedented scrutiny into their personal finances.
Independent registered representatives and their spouses soon could face unprecedented scrutiny into their personal finances.
Following revelations of numerous Ponzi schemes and investment frauds in the financial services industry, Woodbury (Minn.) Financial Services Inc. has told its reps that it has created a mandate to pry into their financial background, as well as that of their wives, husbands and “significant others.”
The company notified its 1,750 affiliated reps and advisers of the ramped-up policy, which will take place during audits of offices, at the end of last month.
“Woodbury may be ahead of the curve,” said David Bellaire, general counsel and director of government affairs for the Atlanta-based Financial Services Institute Inc., an advocacy group for independent broker-dealers and their advisers. “Other members are re-evaluating what they review.”
The Securities and Exchange Commission and the Financial Industry Regulatory Authority Inc. of Washington and New York do not require broker-dealers to investigate the financial lives of their reps' spouses or significant others.
The move by Woodbury appears to be a response to a recent SEC action against Royal Alliance Associates Inc. of New York, said Mr. Bellaire.
In an April administrative proceeding, the SEC penalized Royal Alliance $500,000 because it failed to establish adequate procedures to examine the operational bank records of satellite offices 10 years ago. Because of that failure, Royal Alliance allowed a rogue rep to flourish, the SEC said.
Brian Murphy, chairman and chief executive of Woodbury, declined to be interviewed last week.
In an e-mail, however, he confirmed that pressure from securities regulators prompted Woodbury to make the move.
“It's clear from recent enforcement actions that the SEC expects firms to look at rep financial information,” Mr. Murphy wrote. “After the rationale was explained, Woodbury reps understand that this is a regulatory requirement of the profession. As with any new procedure, we will smooth out the impact over time and give our reps comfort that this information, just like all other information we share, will be secure and private.”
During audits, broker-dealers routinely ask reps and advisers for financial information such as bank statements of their individual practices. Firms also have collected personal financial information such as a rep's personal bank statements and tax returns, but typically only if the firm had concerns about a rep's practice.
AN UNPRECEDENTED STEP
But reps and executives at other firms said it was unprecedented for a broker-dealer to look at the private financial records of a spouse or significant other.
In a written question-and-answer sheet for Woodbury's advisers dated May 27, the firm stated: “Due to recent industry trends and representative fraud, Woodbury is now required to collect financial information from reps during field audits. The required information consists of personal and business bank statements. In addition, we may also request tax information and business financial statements.”
Woodbury also wants to look into the financial lives of its advisers' spouses and significant others, which the firm defines as “a person with whom you live and with whom you have a long-standing (at least more than six months) relationship. It does not include your children or parents.”
“The purpose of the check of financial information is to detect and prevent fraud on customers,” the firm said. “Unfortunately, such a program would not be complete if we were not to obtain spouse/significant-other information.”
Woodbury, however, did not explain in detail how collecting such information will work. It did stress that the gathering of the information did not violate any laws protecting privacy and that advisers would be better off if they agreed to it.
“We will request your permission to access your personal financial information,” the firm said. “You may, of course, choose not to comply, and we will not "take' your information forcibly. Such a decision, however, places Woodbury in a difficult position with regulators, as this is now a requirement, and failure to comply with regulatory requests and guidelines could cause Woodbury to lose control as to Finra/SEC's continued licensing of a representative.”
One Woodbury adviser put it more bluntly.
“In addition to this, Woodbury just forced us to agree to have ongoing credit checks and criminal-background checks or be terminated for cause,” the adviser, who asked not to be identified, wrote in an e-mail.
Woodbury's de-mand for more access to advisers' personal financial information comes after its laying to rest problems it had with the SEC over protecting its clients' private information.
In April, the SEC fined Woodbury $65,000 for a violation of Regulation S-P, which prohibits disclosure of non-public personal information about clients to non-affiliated third parties such as broker-dealers.
E-mail Bruce Kelly at bkelly@investmentnews.com.
