Conference Call: Broker scrutiny steps up

The broker-dealer industry’s chief regulator is launching a program to better monitor branch-office operations and will also step up its hunt for misleading advertising by online brokerages.

The National Association of Securities Dealers Regulation Inc. outlined the new initiatives at the Financial Planning Association’s broker-dealer conference this month in Orlando, Fla.

In a panel discussion at the conference, the NASDR revealed plans for a program called Insite that would let it track branch-office activities of broker-dealers.

The move is in response to calls by the Securities and Exchange Commission to boost its branch-office examination program.

Daniel M. Sibears, senior vice president and deputy of NASDR’s member-regulation department, outlined the new program.

Red flags

Insite includes software that allows regulators to access and download information about a firm.

The NASDR will assess the information and generate a “report card” that helps regulators identify red flags in a firm’s operations.

If a firm is red flagged, an examination will be conducted at its headquarters. The firms that are typically examined have employees under special supervision or reps who have been disciplined in the past, according to panel participants.

The panel was also concerned about broker-dealers that are engaged in business activities unrelated to securities and urged firms to monitor their practices, especially if brokers are based outside their home office.

“The further away you are from the home office, the more supervision you need,” said another panelist, Ralph Lambiase, director of the securities and business investments division of the Connecticut Department of Banking.

A pilot program using the software began this month, but the NASDR could not predict when it would be fully implemented.

Also speaking at the conference, Mary L. Shapiro, president of NASDR, said the growth of online brokerage services is an area of concern for the regulatory agency.

Ms. Shapiro said the NASDR is also committed to aggressively pursuing misleading advertising by the industry that might adversely affect investors.

“We have required several online brokers to pull television and print advertisements that violated the standards governing member communications, and we will do it again,” she said.

Ms. Shapiro said that while online services do provide more choices, more information, lower costs and easier account access for investors, there is a downside.

“Much of the real benefit to investors is lost when the broker-to-client relationship ceases to exist and is replaced a by a computer-to-computer relationship.”