Small Broker Dealers Part 1: The Impact of Dodd Frank & Tips from CCOs Who Know

As exhibiting sponsor of the 2010 NSCP Annual Membership Meeting, an educational forum for compliance professionals within the securities industry, ACI benefited from the dissemination of a dizzying amount of information regarding regulatory developments for broker dealers, investment advisors and hedge funds. While the following is nowhere near a comprehensive summary of compliance regulations and obligations for industry professionals and should not be considered legal advice of any kind, there were a number of take away items regarding the impact of Dodd Frank financial regulations on small broker dealers and tips from small firm CCOs.

The Dodd Frank Wall St. Reform and Consumer Protection Act – A Few Considerations for Small Firm Broker Dealer

The structure of oversight has changed with the introduction of new organizations such as the Financial Stability Oversight Council (FSOC) and the Office of Financial Research within the FSOC. The Financial Stability Oversight Council (a 10 Member board of regulators) is invested with the authority to designate those entities significant for supervision based on those deemed systemically significant. By procedure, the Federal Reserve will identify those potentially “significant” companies and the council will then qualify which of those are/are not significant. The criteria to consider what entities are systemically significant is being developed and could include factors such as leverage, counterparty exposure, extent to which they apply credit, and the degree to which assets are managed vs. owned. The Financial Stability and Oversight Council is mandated to look across all markets to make sure regulations are doing what they’re intended to do, so it will likely interact with other regulatory agencies such as the SEC and SROs such as FINRA.  In that effort, the Office of Financial Research – within the Financial Stability Oversight Council – has the role to collect data, and broker dealers can expect to receive requests for information to be reviewed.

The Volker Rule (Title 6) – prohibits a bank or institution that owns a bank from engaging in proprietary trading that isn't at the mandate of its clients, and from owning or investing in a hedge fund or private equity fund, as well as limiting the liabilities that the largest banks could hold. There are definite concerns regarding the competitiveness of banks in global marketplaces in light of this rule.

OTC Swap Markets (Title 7) - Major swap participants subject to new collateral requirements

For Investment Advisors (Title 4) (Section 4.12) or dually registered BD/IAs there are changes to the definition of accredited investor for Reg D, and in regards to the $1 million net worth test – when calculating net worth the firm may exclude the value of prime residence.

Credit Rating Agencies (Title 9) – can now be sued which will likely have the practical effect of resulting in increased fees. Additionally, MSRB Registration is required for municipal advisors.

Uniform Fiduciary Standard – in the words of Suzanne Barlyn at The Wall Street Journal “brokers are required to recommend investments that are suitable for each client, taking into account factors such as the client's age, goals and risk tolerance. ‘Suitable,’ however, doesn't necessarily mean ‘best.’" - Suzanne Barlyn, WSJ, “What’s No. 1 for Brokers”.

There is a New Registration Category for qualified back office personnel that targets unregistered persons to make sure back-office understands securities industry and requirements. These individuals are fingerprinted in CRD already but will need to undergo an examination process which is being developed.

See Part 2 for more on: Small Broker Dealers: The Impact of Dodd Frank and tips from CCOs who know