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November 1, 2002

Small Firms Groan Under Burden of Regs: Is 1984 Finally Coming to the Street?

By William Hoffman

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  • Small Firms Groan Under Burden of Regs: Is 1984 Finally Coming to the Street?

When are brokerage regulations onerous? Right now, many executives complained at a recent conference.

Firms are now required to keep more records than ever before and investigate the source of much of the money they receive. This increasing regulatory burden is bothering many officials of firms, according to attendees at the recent Securities Industry Association's Small Firms Conference in Dallas.

"People don't always want to tell you how they made their money. People don't always want you to know their net worth," said Christopher Charles, president of Wulff, Hansen & Co., a San Francisco retail municipal bond brokerage in San Francisco.

The common complaint of attendees made to Traders Magazine was the recently enacted Patriot Act. It requires all securities firms to implement anti-money laundering compliance programs. The law also requires that broker dealers monitor suspicious activity (frequent transactions, use of cash equivalents, wire transfers, etc.), train registered representatives and staff, name an anti-money laundering compliance officer and conduct periodic independent audits.

Many brokerage officials also complained that the law also requires broker dealers to verify client identity, sources of income and establish risk-based data gathering systems for institutional and non-U.S. individual accounts, foreign and off-shore entities, hedge and investment funds and other intermediary relationships. If a broker dealer observes activity suggestive of terrorism or money-laundering, the firm may have to report its client to the federal government.

"The problem for us isn't the fact they're implementing the program," said F. Scott Koonce of Koonce Securities, Inc., a full-service brokerage in Bethesda, Md. "The problem is what we have to do. It's 33 different parameters that we have to automatically key, [and] some of the information we're not currently collecting."

At conference workshops the National Association of Securities Dealers touted anti-money laundering guidance, templates and statement stuffers posted at its Web site for members. The site also offers a portal to the U.S. Treasury Department's Office of Foreign Assets Control (OFAC). It contains a "specially designated nationals and blocked persons" search engine to identify potentially troublesome clients.

Charles said that, "It's going to be perhaps a little difficult with some customers to get and maintain the continuing information we're required to get without alienating or offending them. Even though we're not responsible for the need, we're the ones in the front line that have to get it."

Robert M. Hackel, director at R.F. Lafferty & Co., a New York-based options broker, said, "We just went through an NASD audit, and they were certainly looking heavily at" anti-money laundering compliance. "Over the years they always seem to pick one item that they feel they're going to look at more heavily than other items," he said.

All attendees reported spending more time on regulatory compliance, though few could quantify it. Matthew Crump, chief operating officer as well as compliance officer for Cutter & Co, in Chesterfield, Missouri, said he's working longer hours.