Finra floats ADV form for brokers

In yet another sign of the move toward regulatory harmonization, the Financial Industry Regulatory Authority Inc. has asked for input on how to create an ADV-like form for broker-dealers.

Form ADV is the key disclosure document used by investment advisers. It requires detailed disclosures of services, conflicts and fees.

In a regulatory notice issued late last month, Finra said that the form would be an “upfront disclosure document that sets forth in plain English a firm’s accounts and services, its associated conflicts of interest and any limitations on duties owed to the customer.”

In the notice, which observers described as a concept release, Finra said that an ADV-like form might disclose conflicts in the sale of certain products and whether fees were received from product providers. Firms would also disclose whether brokerage fees were negotiable, and instances where brokers received higher pay on some products.

Finra asked whether the initial proposal seemed too broad or too narrow, and when and how the disclosures should be made. Comments are due by Dec. 27.

The addition of an ADV-style document would be a significant change for brokers. (Read about some significant changes made to the ADV Form 2.)

“Historically, broker-dealers have done separate disclosures for products, privacy notices, business continuity disclosures” and the like, said compliance consultant Nancy Lininger. “This will be a challenge [for broker-dealers] — bringing it all together under one plain-English document.”

Brokerage customers don’t currently receive any disclosures about conflicts, Ms. Lininger said.

Because individual registered representatives would provide the new document to clients, the disclosures would “beg additional questions about the firm itself and its conflicts,” said Brian Hamburger, a compliance consultant and founder of MarketCounsel LLC.

Registered investment advisers get those questions, too, he said, “but broker-dealers, by the very nature of their business, have significant conflicts of interest that advisers don’t have,” such as incentives to generate commissions, sell proprietary products or engage in proprietary trading contrary to a client’s position.

Finra sees the disclosure document as explaining to investors “that they’re in the broker-dealer channel,” said Marc Menchel, Finra’s executive vice president and general counsel of regulation.

It would describe the services they got, the products sold, the fees charged, and the broker-dealer’s conflicts and how they were resolved, he said.

But the idea of an ADV-like form is “overkill,” said Jim Biddle, founder of The Securities Center Inc.

The disclosure document could also “become an exam item” for which firms could get into trouble if it weren’t done to Finra’s liking, Mr. Biddle said.

“That’s not the point of the exercise — it’s not another prong to hit firms with,” Mr. Menchel said.

Brokerage firms are “going to get tagged [with] a common standard of care” that requires more disclosures, he said, and developing an ADV-like form is a way to get ahead of the curve.

The Dodd-Frank legislation requires the Securities and Exchange Commission to study the obligations of broker-dealers and investment advisers, and analyze the regulatory gaps between them. In addition, Dodd-Frank requires better disclosures of conflicts by both broker-dealers and advisers.

SEC members have also been urging more adviser-like disclosures of the brokerage community, Mr. Menchel and other observers said.

“Even before Dodd-Frank, we were paying attention to how to harmonize these [disclosure] regulations,” he said.

But many in the industry worry that customers are already overwhelmed with disclosures.

“Disclosure documents should be focus-group-tested with investors, and not bog them down in arcane detail,” said David Bellaire, general counsel of the Financial Services Institute Inc., which plans to respond to the Finra notice.

Disclosure should be “narrowly focus[ed] on issues that are truly important to investors,” he said, such as the nature and scope of the business relationship, compensation and material conflicts.

“Part of the issue is to strike a balance, and not blind [investors] with science,” Mr. Menchel said.

One solution might be to offer summary disclosures in a client document and refer investors to a website for more-detailed information, he said.

Mr. Menchel stressed that the final outline of any disclosure form would be shaped by comments that Finra received.

E-mail Dan Jamieson at [email protected].