New rule should aid examinations, enforcement

With a few minor concessions to limit red tape, state regulators have been handed a new weapon to help them police errant brokerage firms and insurers that sell securities.

Ending a six-year debate, the Securities and Exchange Commission late last month adopted a new rule outlining how to handle records that could be useful in regulatory investigations.

The securities and insurance industries, as well as state regulators, were pleased with the rule, which the SEC had worked on since 1995. The rule will take effect in spring 2003.

“It cannot be stressed enough, the importance of these rules to the states,” said Don Saxon, director of the Florida Department of Banking and Finance’s securities division, who spoke at the SEC meeting last month.

“It has been our experience that examination and enforcement efforts are often hindered by the absence of key records in offices,” he said.

Investor protection

Securities and insurance companies won at least one key concession: They won’t have to keep supervisory records in every branch office, no matter how small.

But they will be required to make available purchase and sale documents, customer records and complaints, records on representatives, communications with the public, and supervisory procedures for each office.

The new rule will also require companies selling securities to keep records on each customer and furnish them to the customer periodically.

But brokers and others selling securities will not have to meet that requirement if they are not required under federal or self-regulatory-organization rules to make suitability determinations for their customers.

That provision in the rule generally will exclude online brokers, since they don’t make recommendations to customers concerning which securities to purchase.

“The firms … objected to the creation of records relating to suitability information,” Michael Macchiaroli, associate director for the SEC’s division of market regulation, said at the meeting. “That would be very burdensome, particularly if they weren’t making recommendations.”

Under the rule, firms must also include information, on each order ticket, identifying the representative responsible for the account, as well as any other employee who entered or accepted customer orders.

The rule is specifically designed to help examiners enforce sales-practice rules and make examinations at local offices easier.

“Our emphasis has always been on investor protection by conducting sales-practices examinations within our borders,” said Mr. Saxon. “The rule is vital to our ability to carry out efficient and uniform examinations.”

An earlier version of the rule would have required that each office keep all books and records so state examiners could review them during a surprise visit, Mr. Macchiaroli said. “That was a very controversial thing, because the firms obviously had a difficult time with that,” he said.

The rule was later changed to allow firms to have the records shipped to the local office or a place designated by the state in the event they were requested by regulators for an exam.

Carl Wilkerson, chief counsel for securities and banking at the American Council of Life Insurers in Washington, says that the changes made by the SEC were important to insurance agents who sell securities.

Those agents often work at limited-service broker-dealer firms associated with insurance companies that sell a small range of securities products, Mr. Wilkerson says.

Insurance companies have many geographically dispersed offices with few employees, he says. It would have been very burdensome for small offices to create and store the records required under the rule, Mr. Wilkerson says.

welcomed

The Securities Industry Association in Washington, which represents the brokerage industry, also applauded the revised SEC rule.

“This represents a long effort of the SEC, [the North American Securities Administrators Association] and the SIA to reach a balanced compromise that addresses legitimate law-enforcement concerns, while at the same time respecting the need to accommodate different business models and to minimize unnecessary costs,” SIA general counsel Stuart Kaswell said.