New Exchanges in Newark

By Chris Hayes, FSI State Regulatory Affairs Counsel

train-to-newarkContinuing on the path of FSI’s State Outreach Plan, members of our team have organized and attended meetings with several state regulators to discuss issues of importance to our industry. Last week, I traveled by train to the Garden State to meet with Abbe Tiger, the Bureau Chief of the New Jersey Bureau of Securities. This time, It was a fairly large meeting. Joining us at the meeting were: Adam Paglione, BCG Securities; Abby Henig, AIG Advisor Group; Sandra Cassidy, Pruco Securities; Scott Depew, Pruco Securities; Rich Dragotta, LPL of Paramus; Dennis McPartlan, LPL of Paramus; Amy Kopleman, New Jersey Bureau of Securities; Susan Largman, New Jersey Bureau of Securities; Stephen Bouchard, New Jersey Bureau of Securities; and (of course) Abbe Tiger, New Jersey Bureau of Securities.

The meeting was conducted in Newark, New Jersey, in the Bureau of Securities’ office, and the agenda items included introducing FSI and its members to the New Jersey Bureau of Securities; explaining the independent broker dealer business model; sharing areas where FSI has worked or sought to work with state regulators and NASAA; and discussing ways in which FSI and its members can be a resource to the states.

A large focus of the meeting was on investment adviser issues, particularly in the context of the independent broker dealer (IBD) model.  The Bureau was very interested in the number of financial advisors of IBD’s operating their own independent registered investment advisor (RIA) firms; firms which tend to be regulated by the states.  A number of our members were able to shed light on the IBD model and the supervision they conduct on their advisors that operate independent RIAs. Two member firms indicated they are moving away from allowing advisors to operate an independent RIA – due to concerns about compliance – and encouraging these advisors to be representatives of their corporate RIA.

The Bureau indicated its concern with the IBD model overall, stating that they believe, due to “geographic and legal remoteness,” that supervision is less vigorous in the channel.  FSI vigorously disagreed and explained the extensive efforts IBDs undertake to ensure that the supervision of their representatives is accomplished in a strong and effective manner.  The Bureau was also concerned about several issues relating to RIAs, including potential conflicts in regard to fees and the conversion of clients from being a broker-dealer customer to a customer of the affiliated RIA; concerns about assets under management monitoring under independent RIAs; and consistency and accuracy in Form ADV disclosures – on this issue, the Bureau would like to see what the firm is “actually” focusing on rather than just describing tangential activities.

The Bureau also indicated it may craft a new rule for state registered RIAs to have their own compliance manual and procedures; the Bureau has also created a new survey of state RIAs in order to allow the Bureau to more effectively target and do sweeps of problematic state RIAs.

The Bureau is also very concerned with the SEC v. Schwab case and mandatory arbitration agreements in new account forms.  We let them know that we haven’t taken a position on mandatory arbitration, but indicated that our newly formed FINRA Arbitration Task Force was looking at this issue.

Bureau Chief Tiger was very gracious and said she looked forward to meeting us again next year.  We also learned a great deal about areas the Bureau is concerned with, particularly in the investment adviser space.

What would you want to discuss with state regulators about our industry if you had the chance? Let me know in the comments section!

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