Advisors often refer to their broker/dealer’s compliance department as the sales prevention department. They’re all too happy to share stories about potential sales that were quashed for compliance-related issues with which they disagree.
But of course, there’s always another side to the story. There are plenty of sales your broker/dealer may have prevented thereby preserving your reputation, as well as theirs.
The compliance department’s objective is not to prevent sales, but to manage the risks associated with sales – risks to clients, advisors and firms. By managing risk, the broker/dealer in turns helps protect and preserve the strong, long-term relationships you’ve built with your clients.
There are times when the only way to effectively manage risk is to prevent a sale, trade or strategy. If you had a similar situation to that of the following examples, you’ll be glad they did. Consider some of the worst of 2009:
Auction rate securities:
- “Wells Fargo To Repay Clients Who Held Auction Rate Securities,” Wall Street Journal, November 18, 2009
- “FINRA Announces Agreements with Three Additional Firms to Settle Auction Rate Securities Violations,” FINRA News Release, September 2, 2009
Unsuitable private placements, including Medical Capital Holdings, Inc. and BBC Equities LLC.:
- “Financial advisers face more questions from clients wary of turmoil,” Crain’s Cleveland Business, November 16, 2009
- “SEC Halts $50 Million Offering Fraud and Ponzi Scheme in Detroit Area,” SEC Press Release, July 28, 2009
- “Medical Capital Notes Class Action Lawsuit Filed for Investors,” AboutLawsuits.com, November 30, 2009
Unsuitable tenant in common (TIC) investments, including DBSI, Inc.:
- “Idaho TIC Sponsor Sued for Securities Law Violations,” Idaho Department of Finance News Release, January 15, 2009
Your broker/dealer’s compliance department also helps manage risk by developing policies and implementing procedures for advisors and supervisors. Through adherence to those procedures, some advisors and carriers avoid seeing their names in headlines like these in 2009:
- “Finra Fines MetLife Units $1.2 Mln For Lax Email Monitoring,” Wall Street Journal, November 18, 2009
- “Scottrade Fined $600,000 for Inadequate Anti-Money Laundering Program,” FINRA News Release, October 26, 2009
- “FINRA Fines NEXT Financial Group $1 Million for Supervisory Failures That Led to Churning of Customer Accounts, Excessive Commissions,” FINRA News Release, July 22, 2009
Ultimately, your broker/dealer works with you to help your clients realize their retirement hopes, want and needs. In addition to investment products, advisory programs, marketing support and operational efficiencies, risk management is a key component in what your broker/dealer provides you and your firm.
It’s often said, but we’ll say it again – Good compliance is good business.
Loyall Wilson is senior vice president and chief compliance officer with Securian Financial Services Inc.