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Tuesday, February 13, 2018

Advisor v. Broker-Dealer - Email, Outside Business, Suitability

By Cory Roberson, Principal at RIA Review and RIA Consults

Last month, we started a continuing education series on FINRA compliance rules in order to provide firms with further insight into overlapping regulations between the investment advisory and the broker-dealer worlds.  This month, we advise advisors to take a closer look into their business model and activities to anticipate any needed compliance changes. 
Given the rise in popularity of robo-advisory models and the number of RIAs who dually register with FINRA and as a state securities agent, it is important for firms to take appropriate steps to boost their compliance.  Advisors with both types of operations must understand their compliance reporting requirements to appease FINRA, MSRB, SEC, and state jurisdictions.
What is an example of a business model with both operations?
A Robo-Advisor is a business model that includes both advisory and broker-dealer activities. In short, the robo-advisory platform is an algorithmic trading model or securities instrument.  This instrument may engage in the issuing, registering, and selling of its securities (sell-side), and concurrently act as the advisor engaged in buying securities on behalf of client portfolio accounts (“buy side”). 
Factoring in regulatory rule overlaps
Below is a list of four overlapping requirements monitored for both firm types:
1. Reporting Disciplinary History
For: Advisors and Broker-Dealers
SEC Section 206 (“anti-fraud provisions”) advisors act
FINRA Rule 3110
FINRA/SEC/State Compliance Review Procedures:

SEC, State, and FINRA firms must report disciplinary history on its U-4.  
FINRA also reports disciplinary history on a Form U-6, and initially on Form B-D
SEC and State advisors report on Form ADV.

Six Types of Disciplinary History:  
Criminal cases such as investor fraud, theft, or misappropriation of funds.
Administrative/Civil cases heard in arbitration or court.
Regulatory Agency Action cases based on a particular ruling from a regulator.  
Bankruptcy/Creditor issues surrounding financial/credit reporting agencies.
Customer Complaints

2. Email Monitoring (Rule 17A-4)

For:  Broker-Dealers and Registered Investment Companies (mutual funds)


SEC Exchange Act (SEA) Rule 17(a)-4

Along with the Exchange act, FINRA Rules 3110 and 4511 of the exchange act requires broker-dealers to use a digital system to store a comprehensive record of securities transaction and general business correspondence.
FINRA Compliance Review Procedures:
What information was reviewed?
Who was the person reviewing materials?
What was the date of review

Firms action
Note of regulatory issue
If yes, document and escalate as needed.

SEC Compliance Procedures:
Standalone advisors, funds, or dually registered RIAs can also use aforementioned guidelines for Rule 204-2, 17(A)-4 and books/records requirements.  

Most advisor books/records requirements include provisions for electronic storage and not necessary the specified monitoring required by FINRA’s Rule 3110 and 4511.

Supervision can be delegated to an unregistered person – but principal has primary responsibility for monitoring emails.

3. Outside Business Activities

For:  Advisors and Broker-Dealers


SEC Rule 206(4) – 1 and Similar State Rules
FINRA Rule 3270 (supervision of outside activities)

FINRA/SEC/State Compliance Procedures:

Reps must notify OSJ in writing of activities and report on U-4 within 30 days of change.
Reps must notify advisory firms of activities and report on U-4/Part 2B (Item 4) within 30 days of changes.  Management persons must also report on Item 19.

4. Suitability Documentation
For:  Advisors and Broker-Dealers
FINRA Rule 2111, SEC and State share similarities
Required when selling products, such as variable annuities and certain mutual fund types, registered representatives.  
FINRA/SEC/State Compliance Procedures
Suitability Questionnaire

Contains an overview of clients’ history, preferences, and guidelines for making investment 
recommendation, securities purchases, and overview portfolio monitoring services.  

Typically, this questionnaire will contain a summary of the following:

Financial Situation/Needs
Tax Status
Investment Objective
Investment Experience
Investment Time Horizon
Risk Tolerance

More FINRA Compliance procedures:

FINRA Rule 2111 goes a step further by providing three measures of suitability

Reasonable Basis – is this a fair and accurate portrayal of client guidelines?

Customer Specific – Are customers informed of activities?

Quantitative Basis – Are securities and types appropriate?

Firms with both operations should create a compliance program/manual for Investment Advisory and Broker Dealer activities. 
With that said, advisors can reduce their regulatory burden by keeping track of rules that will cover regulations for both entities.
Municipal Securities Rulemaking Board (MSRB)
Financial Industry Regulatory Authority (FINRA)
Securities and Exchange Commission (SEC)

Our Mission: “Serving the Investment Community to Make a Social Impact

Investment Advisor/Compliance/Broker Dealer
Cory Roberson is Principal of RIA Review, a compliance and document management portal - 130+ users and growing.  

He is also Principal of RIA Consults -Roberson Consults Group), a consulting firm providing compliance, operations, and business development services for registered investment advisors and next-gen fintech entrepreneurs -  To date, RIA Consults worked with more than 160 SEC & State advisors clients across the US (including a few in Europe).  Our integration division, RegConsults helps to mitigate compliance issues for other Fintech businesses.  

RegTech Products, a compliance tech notifications portal featuring RIA and other regulatory Products (SaaS/IaaS -beta) –

Fin Community is a member rewards and business listing network featuring providers in the FinTech, RegTech, Crypto and Blockchain communities (website coming soon).

As a social entrepreneur, through his mission-driven arm SoCap Missions (, he provides business support group sessions and has volunteered for more than fifteen youth programs in locations such as like S. Korea, China, S. Africa, Thailand, and India.

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