Is FINRA's 05-50 still a valid concern?
November 16, 2010 by Kevin Vozar
Published 11/2/2010
With the demise of SEC Proposed Rule 151A, many broker-dealers and their registered representatives are wondering, “So does that mean 05-50 is also dead?” The answer is a resounding NO!
The FINRA Rule that governs registered representatives outside business activities is Rule 3030. Rule 3030 clearly articulates what a registered representative’s responsibility is as to advising their broker-dealer what they are doing in the way relating to any outside business activity, whether that activity is a separate business, running for political office, etc. A good rule of thumb as to whether you should disclose an outside business activity to your broker-dealer or not is simple: If you earn any form of revenue pursuing this activity, or if there can be any kind of conflict of interest generated from these activities, your broker-dealer needs to know.
Aside from that, the main issue regarding Rule 3030 is the interpretation of your broker-dealer’s supervisory responsibilities as it relates to these outside business activities, or more succinctly, their ability to decide whether you can engage in that activity or not at all. This is the whole crux of Notice to Members (NTM) 05-50. In fact, I believe that centering 05-50 around fixed indexed annuities (FIAs) was just a smoke screen of what FINRA really wants: to control, supervise and oversee the entire world of finance!
Walk in your B-D’s shoes
Before we go any further, I would like you to put yourself in your broker-dealer’s shoes for a moment. To offer securities to the general public, the broker-dealer needs to ensure that the products they offer are appropriate, suitable and viable, and issued by fiscally responsible and compliant companies.
They then have to maintain their own financial health and well-being. More specifically, they have to maintain their net capitalization and ensure that the numerous reports needed are filed to FINRA in a timely fashion. Then they can go and recruit registered representatives to sell through them. They then are responsible for screening the background of these prospective registered representatives and must disclose to FINRA how and when they will supervise these advisors’ sales, marketing and business activities.
In the event something in this long list of responsibilities and tasks is performed incorrectly, or something “falls through the cracks” (i.e., a report is wrong, or a registered representative mis-sells or misrepresents a product), the broker-dealer, its officers, and financial operations people can be held not only corporately liable and subject to financial, civil, or even criminal sanctions, but could be held personally liable as well
Would you want that responsibility?
That will be the argument of broker-dealers and FINRA. They will say, and with good reason, that their registered representatives’ FIA business will need to continually be supervised in some fashion because if their actions cause a client a financial hardship, not only will the registered representative be responsible, but so will the broker-dealer.
The argument that 05-50 is no longer valid and enforceable, though “technically” accurate, will still be enforced by individual broker-dealers to give them a comfort level, and quite frankly, they and FINRA have a strong argument. After all, isn’t that what the recent Frank-Dodd Financial Reform Act called for? Oversight and supervision? Of course it is. In fact, FINRA could come out the real hero in all of this. Wouldn’t that be something?
With the demise of SEC Proposed Rule 151A, many broker-dealers and their registered representatives are wondering, “So does that mean 05-50 is also dead?” The answer is a resounding NO!
The FINRA Rule that governs registered representatives outside business activities is Rule 3030. Rule 3030 clearly articulates what a registered representative’s responsibility is as to advising their broker-dealer what they are doing in the way relating to any outside business activity, whether that activity is a separate business, running for political office, etc. A good rule of thumb as to whether you should disclose an outside business activity to your broker-dealer or not is simple: If you earn any form of revenue pursuing this activity, or if there can be any kind of conflict of interest generated from these activities, your broker-dealer needs to know.
Aside from that, the main issue regarding Rule 3030 is the interpretation of your broker-dealer’s supervisory responsibilities as it relates to these outside business activities, or more succinctly, their ability to decide whether you can engage in that activity or not at all. This is the whole crux of Notice to Members (NTM) 05-50. In fact, I believe that centering 05-50 around fixed indexed annuities (FIAs) was just a smoke screen of what FINRA really wants: to control, supervise and oversee the entire world of finance!
Walk in your B-D’s shoes
Before we go any further, I would like you to put yourself in your broker-dealer’s shoes for a moment. To offer securities to the general public, the broker-dealer needs to ensure that the products they offer are appropriate, suitable and viable, and issued by fiscally responsible and compliant companies.
They then have to maintain their own financial health and well-being. More specifically, they have to maintain their net capitalization and ensure that the numerous reports needed are filed to FINRA in a timely fashion. Then they can go and recruit registered representatives to sell through them. They then are responsible for screening the background of these prospective registered representatives and must disclose to FINRA how and when they will supervise these advisors’ sales, marketing and business activities.
In the event something in this long list of responsibilities and tasks is performed incorrectly, or something “falls through the cracks” (i.e., a report is wrong, or a registered representative mis-sells or misrepresents a product), the broker-dealer, its officers, and financial operations people can be held not only corporately liable and subject to financial, civil, or even criminal sanctions, but could be held personally liable as well
Would you want that responsibility?
That will be the argument of broker-dealers and FINRA. They will say, and with good reason, that their registered representatives’ FIA business will need to continually be supervised in some fashion because if their actions cause a client a financial hardship, not only will the registered representative be responsible, but so will the broker-dealer.
The argument that 05-50 is no longer valid and enforceable, though “technically” accurate, will still be enforced by individual broker-dealers to give them a comfort level, and quite frankly, they and FINRA have a strong argument. After all, isn’t that what the recent Frank-Dodd Financial Reform Act called for? Oversight and supervision? Of course it is. In fact, FINRA could come out the real hero in all of this. Wouldn’t that be something?
Changing the rules
Now that we established that 05-50 will, in all likelihood, be enforced by the individual member firms, what does that mean for advisors who offer FIAs and who are also registered representatives? Unless they want to give up and “park” their registrations, they will still have to abide by their broker-dealer’s rules. But there is yet another problem many registered representatives don’t see or understand: The broker-dealer they are currently affiliated with can change the rules at anytime, and with little or no notice:
- Today, your broker-dealer may allow you to market with seminars; tomorrow, they may not.
- Today, they may readily approve your advertising; tomorrow, they might be a little more critical.
- Today, they might be OK with a non-10/10 annuity; tomorrow, they may not.
- Today, they might let you sell an A- rated annuity; tomorrow, they might not.
- Today, they may allow you to sell FIAs as an outside business activity and “off the grid;” tomorrow, they might not.
- Today, they might let you offer bonus FIAs; tomorrow, they may not.
The list is endless. What will you do if your broker-dealer makes some of these changes?
You have to ascertain who owns and controls your broker-dealer. This is important because if your current national marketing organization (NMO) just has a “referral” relationship with a non-affiliated broker-dealer, they (the NMO) have no control or say in the way that broker-dealer may change its internal policies.
Instead, the best alternative for the advisor who wants to be a holistic planner and offer FIAs as part of a client’s planning solution, and wants to be able to offer a full plate of products and options, is to affiliate with a broker-dealer that is owned and controlled by a group who understands what today’s true advisor really wants and needs.
There is no guarantee that even a friendly broker-dealer won’t change what they can and can’t do. They exist at the mercy of FINRA, but internal, non-FINRA mandated changes are far less likely.
The last thing I would like to mention is whether or not an existing registered representative should “give up and park” their registration and just sell FIAs and other fixed products. I can’t answer that for you, other than to say, securities are and will continue to be a major part of retirees’ portfolios and not having those tools in your arsenal may be short-sighted and limit your ability to compete with an advisor who does have all the tools.
Conclusion
The lesson to be learned here can be summarized with these four points:
1. NTM 05-50 will continue to be enforced by broker-dealers.
2. Broker-dealers fall into two camps: FIA-friendly and not so FIA-friendly.
3. The broker-dealer you should be with is one who is FIA-friendly, and one who is owned and managed by a group who “gets it” and won’t make material FIA policy and procedure changes “just because.”
4. Securities are and will continue to be a big part of your clients’ portfolios and you need to understand that in today’s compliance world, not having them in your toolbox may prove to be counter-productive.
Good luck and celebrate the demise of 151A, but remember this was just a battle in a much bigger war!
Kevin E. Vozar is chief operating officer of Producers Equity Group and oversees the daily operations of their insurance NMO, broker-dealer and RIA. For over 28 years, he has specialized in retiree insurance and financial planning issues. His expertise includes insurance, investment, estate, tax, and legacy planning. Vozar has held many insurance and securities licenses, including life, health, variable annuity, and Series 6, 63, 7, 65, 24, 51, 53 and 27/28. He holds a MBA (Taxation). He can be reached at kvozar@crproducers.com.
