Truly RIA-Friendly Broker-Dealers on the Horizon?
By John I. Sanders and Lauren HendersonFINRA recently proposed a rule (the “Proposed Rule”) addressing FINRA-registered broker-dealer’s (“Broker-Dealers”) responsibilities to supervise the outside business activities of their registered representatives (“Registered Representatives”). According to FINRA, the Proposed Rule is “intended to reduce unnecessary burdens while strengthening investor protections relating to outside activities.” Notably, the Proposed Rule, if adopted, would finally permit Broker-Dealers to be friendly to registered investment advisers (“RIAs”). The Proposed Rule eliminates Broker-Dealer’s ongoing supervision requirements with respect to their Registered Representative’s investment advisory activities, including serving as investment adviser representatives (“IARs”) of RIAs. The Proposed Rule eliminates various supervisory requirements of Broker-Dealers over such Registered Representatives, including e-mail monitoring and advertisement review. The Proposed Rule also limits the Broker-Dealer’s recordkeeping obligations by requiring the Broker-Dealer to only keep records demonstrating compliance with the Proposed Rule. For example, a Broker-Dealer’s recordkeeping requirements generally only apply to the extent that the Broker-Dealer imposes limitations on the investment advisory activity. The Proposed Rule does not, however, eliminate all Broker-Dealer obligations with respect to Registered Representatives serving as IARs. Under the Proposed Rule, Broker-Dealers must perform a reasonable risk assessment of the outside business activity, and may approve a Registered Representative to serve as an IAR of an RIA, with or without limitations. The Proposed Rule recognizes Broker-Dealer supervision of investment advisory activities only creates obstacles for Broker-Dealers, Registered Representatives, RIAs, and IARs, especially considering RIAs and IARs are subject to their own regulatory scheme designed to protect investors. We welcome this long-overdue development. If you have any questions related to the Proposed Rule or Broker-Dealer or RIA regulation generally, please feel free to contact us. John I. Sanders and Lauren Henderson are associates based in the firm’s Winston-Salem office.  FINRA, Proposed Rule: Outside Business Activities, Regulatory Notice 18-08 (Feb. 2018), available at http://www.finra.org/industry/notices/18-08.  Id.  Id. A broker-dealer has greater record keeping and supervisory obligations when the representative relies on the broker-dealer’s broker or dealer registration to conduct the activities. In this circumstance, the activity is deemed to be the broker-dealer’s business and is subject to all applicable securities laws and regulations, including recordkeeping and supervision.  Id.