Compliance April 24, 2008

FINRA Proposes Change In Reporting Sales Practice Violations

The Financial Industry Regulatory Authority (FINRA) has proposed rule amendments that would require registered firms to report allegations of sales practice violations against an individual broker made in arbitration claims or civil lawsuits that do not name the broker as a respondent or defendant.
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FINRA’s proposed amendments are designed to eliminate the inconsistency in reporting of alleged sales practice violations by brokers, FINRA said. That would enable the information to be available to regulators and the public.

As detailed in Regulatory Notice 08-20, such allegations would be reported in the same way as customer complaints are now reported—to the Central Registration Depository (CRD), within 30 days, on Forms U4 and U5.

Currently, firms are required to report customer allegations against a broker in an arbitration claim or civil litigation complaint only if the legal document specifically names the broker as a respondent. A settlement or ruling resolving the allegations also need not be reported if the broker is not named as a respondent.

Increasingly in recent years, claimants and their lawyers have been naming only the firm in arbitrations and lawsuits to bolster their ability to settle their disputes more easily prior to hearing or to litigate if they do not settle. Therefore, neither the allegations of sales practice violations made against the unnamed brokers nor the dispositions of those proceedings are reported to CRD. Consequently, that important information is unavailable to regulators, to prospective broker/dealer employers and to the investing public.

However, if an investor were to make the same allegations against a broker in a written complaint to the firm, the firm and the broker are required under FINRA rules to report the complaint and its contents to CRD within 30 days—and the information would be available to regulators and the public.

Currently, customer complaints and settlements involving an amount of $10,000 or more are reportable to CRD, a threshold that has been in place for years without being adjusted for inflation. FINRA is proposing raising that threshold to $15,000 to more accurately reflect today’s business conditions.

FINRA is also proposing a rule amendment that would allow firms to change the Reason for Termination and Date of Termination sections of the Form U5, which is filed when a broker separates from a firm.

Currently, those sections cannot be changed absent a court order or arbitration award. A staff review has determined that the majority of firm requests to make changes to those sections are to correct clerical errors in the original filing. Firms would still have to provide a reason for changing information in those Form U5 sections and FINRA would notify other regulators and the broker’s current employer when a reason for termination or date of termination has been changed.

FINRA said it will be accepting public comments on the proposals for 30 days, or until May 27.

Perspectives April 23, 2008

Perspective: Understand Your Clients to Improve Your Bottom Line

It seems that nearly everyone today is feeling the pinch of the current economy.
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That’s particularly true for plan advisers, who are seeing reduced profits due to increased industry competition, stiffening pricing pressure, and a drawdown of assets as baby boomers retire and more workers lose their jobs and roll over their 401(k) accounts. At first glance, the outlook may look bleak, but there are ways to create a competitive advantage and increase business in this market.

Client Satisfaction Drives Business

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The old adage “a bird in the hand is worth two in the bush” is certainly applicable when it comes to clients. Given the cost of marketing and bringing in new business, it makes economic sense to make every effort to keep customers already on board. One study1 – based on two surveys of 395 plan sponsors and 415 advisers – revealed that only 53% of sponsors fell into the categories of “satisfied” or “very satisfied.” The rest were at risk for changing providers, with the most common reasons listed as:

  • Adviser retiring or leaving the business (20%)
  • Servicing issues (20%)
  • Lack of support (19%)
  • Insufficient knowledge to handle growing plans (17%).

Only 15% were swayed by lower fees, better provider offerings, or superior investments.

The survey concluded that plan advisers can likely increase annual sales by 10% if they raise satisfaction levels to satisfied and by 20% for very satisfied ratings. In addition to longer plan tenure, satisfied clients often mean more opportunities to generate additional revenue through referrals and cross-selling.

Differentiating Services

The plan sponsors surveyed said employee education and investment knowledge, at 22% and 24%, respectively, were among the most important services their advisers provided. Many (22%) also listed retirement knowledge – including the assurance that plans perform efficiently – as well as objectivity (20%), support (11%), and other (1%).

The survey also found sponsors were not uniformly happy with service they received in the areas categorized as high importance. Plan sponsors were most satisfied with investment monitoring, daily support, and group enrollment meetings, and least satisfied with services they felt were lacking. These weaknesses, which included employee communications, group investment meetings, proactive contact, and industry updates, can contribute to a plan performance gap.

The study recommends adding features such as auto enrollment, auto increases, and employee communication campaigns. Because these drive employee participation, encourage healthy deferral rates, and help participants diversify their investments, they’re vitally important to plan performance. They can also help advisers differentiate their practices.

Plan Performance is Key

Plan sponsors indicated that they were more concerned with plan performance than with investment performance. Plan performance declines when terminated employees remain in the plan. This increases the plan fees, administration costs, and now, especially in light of the recent LaRue lawsuit2, real fiduciary risks. Low satisfaction areas listed above can provide in-roads to improve plan effectiveness. Plan advisers should consider offering:

  • Ongoing employee education and communication services
  • Regular sponsor consultations and measurement of plan performance metrics to ensure objectives are met. These should include participation, contributions, loans, withdrawals, asset allocation, and percentage of terminated vs. active employees, as well as the cost burden of terminated employees and its impact on average account size.
  • Plan features that improve performance. For example, regular programs that remove terminated employees from the plan by providing education on retirement options, access to a broad range of solutions and assistance in rolling into IRAs of their choice. This has the effect of reducing administrative work, fiduciary risk and increasing the average account size, reducing plan related expenses.

In short, it’s all about relationships – in particular, nurturing clients, meeting their needs, and helping them to run more efficient plans. Proactive communication, plan performance solutions, and sponsor/employee education are terrific starting places.

Previous articles in this series are:

Spencer Williams is President and CEO of RolloverSystems, an independent provider of rollover services. Spencer joined RolloverSystems in 2007. Over his career, Spencer’s experience spans starting, building and leading businesses in the financial services industry. Prior to joining RolloverSystems, Spencer served in numerous roles with MassMutual from 1997 to 2007, including founder and CEO of Persumma Financial, LLC (a MassMutual Financial Group company) and as a leader in creating and building the company’s retirement income and rollover IRA lines of business.

© 2008 RolloverSystems, Inc. This article is protected by copyright law. Any redistribution or commercial use in whole or in part is strictly prohibited without the express written consent of RolloverSystems, Inc. The information provided herein is for educational and informational purposes only and should not be construed with investment advice.

 

1. “Growing a 401(k) Practice from the Inside Out,’ Fidelity Investments Institutional Services Company, Inc., March, 2008

2. “Supreme Court Allows Individual ERISA Suits in Landmark Ruling”

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