Does Your Managing Broker-Dealer Go the Extra Mile?

Regulations within the alternative investment industry constantly evolve. With its dynamic nature, it can prove difficult for financial advisors and sponsors to remain compliant. The lack of timely and thorough knowledge of these regulations and adequate surveillance can lead to pitfalls and violations, resulting in fines or other enforcement actions by the SEC, FINRA or state regulators.

According to AdvisorLaw’s 2022 FINRA Enforcement Year-In-Review, the top five FINRA violations related to customer arbitrations in 2022 were:

1. Breach of Fiduciary Duty
2. Negligence
3. Failure to Supervise
4. Breach of Contract
5. Misrepresentation

This is where a managing broker-dealer (MBD) could provide real benefit—but what differentiates a typical MBD from a good MBD? One role of a MBD is to provide support to financial advisors and sponsor clients. However, a good MBD will take the extra step. A good MBD does their research, stays up-to-date on all new and upcoming regulations, and utilizes their expertise to educate and assist their clients. This advisory stance further safeguards their clients and can diminish the chance of future violations. A MBD provides a service, but a good MBD provides a partnership.

We’ve put together a list of what a good MBD does to go the extra mile to help avoid the common violations listed above.

1. Regulatory Guidance: A good MBD provides guidance and support to clients to ensure they are in compliance with applicable regulations. They can help interpret and understand regulatory requirements, implement necessary policies and procedures, and conduct regular compliance reviews to identify and address any potential issues. A good MBD, utilizing their industry knowledge and extensive experience can recognize the beginning of a potential compliance oversight and assist the client appropriately; ideally preventing a much larger issue.
2. Training and Education: A good MBD offers training and educational resources to financial advisors to keep them updated on the latest regulatory developments and best practices. This can include webinars, seminars, and workshops on topics such as compliance, record-keeping, risk management, and ethical conduct. With the addition of FINRA Rule 4111, the necessity for up-to-date education is at an all-time industry high.
3. Review and Oversight: A good MBD conducts regular reviews and oversight of both the financial advisors' and the sponsors' activities to identify any potential violations or areas of improvement. This can involve reviewing client files, transaction records, and marketing materials to ensure compliance with regulatory standards.
4. Risk Management: A good MBD assists their clients in the development and implementation of effective risk management strategies. This can include conducting risk assessments, implementing internal controls and supervision mechanisms, and providing guidance on mitigating potential risks associated with activities such as outside business activities, public appearances, social media, and private securities transactions. On top of that, with exemplary registered representative supervision, taking the necessary actions can be preventative as opposed to reactionary.

A good MBD, like WealthForge Securities, goes above and beyond standard compliance services offering expertise, support, and resources to navigate the regulatory landscape effectively.

Special thanks to Jathan Jackson who also contributed to this post.