5 takeaways from regulatory and compliance news you need to know

5 regulation and compliance stories advisors should be watching

June 30, 2023 2:52 PM

Enjoy complimentary access to top ideas and insights — selected by our editors.

The fiduciary responsibility of broker-dealers in Massachusetts, a pay discrimination lawsuit against Edward Jones and a FINRA arbitration award against Morgan Stanley and two former Charles Schwab brokers are among the issues that have made waves in regulatory and compliance news.

Read our roundup for more on these and other stories that wealth managers are watching.

Massachusetts broker-dealers await ruling on fiduciary responsibilities

The fate of broker-dealers in Massachusetts hangs in the balance as suit and countersuit over the standard of broker-dealer duties go before the state's Supreme Judicial Court.

The initial suit dates back to December 2020 when Massachusetts sued Robinhood Markets for allegedly violating the state's new fiduciary rule. Robinhood has counter-sued, arguing the rule exceeds the state's statutory authority and undermines traditional industry practice.

The case is part of an ongoing debate over the level of fiduciary responsibility for broker-dealers. On one side, as many as 20 states have broker-dealer fiduciary rules. On the other, states with no fiduciary rules are considered "outliers."

Read more:

Robinhood: Massachusetts fiduciary rule could quash broker-dealer industry

Edward Jones’ publicly stated DEI goals complicate lawsuit

Edward Jones is likely to have a difficult day in court after a federal judge ruled that a lawsuit brought by two former employees for pay discrimination could go forward.

The employees cited the company's own statistics to support claims of pay disparities based on gender, sexual orientation, race and ethnicity, despite the firm's well-publicized diversity, equity and inclusion goals.

"It will be interesting to see how the plaintiffs utilize those public promises, and how that works to the plaintiffs' advantage," said Saba Bireda, co-chair of the discrimination and harassment practice group at Sanford Heisler Sharp in Washington, D.C., who believes it doesn't "look good" for the broker-dealer.

Read more:

Edward Jones discrimination lawsuit turns scrutiny on corporate DEI promises

FINRA revises proposals for broker-dealer WFH rules

Remote work may continue to be popular among advisors and brokers post-pandemic, but FINRA proposals for how it should be regulated have been once more revised before seeking SEC approval.

FINRA's revisions tighten up certain aspects of home offices, such as storage of documents, but also relax requirements for in-house inspections, which has caused concern among industry bodies.

"At a high level, we are not in favor of loosening inspection requirements for remote offices," said Hugh Berskon, securities lawyer and president of the Public Investors Advocate Bar Association. Meanwhile, the North American Securities Administrators Association is still evaluating the proposals.

Read more:

Just before deadline, FINRA redoes home work assignment

Independence has its limits for brokers at Cetera

Independent brokers at Cetera recently received a timely reminder from corporate compliance that before selling all or a partial interest in their practices, they need the wealth manager's approval or may face scrutiny from FINRA.

While some see this shot across the bows as restricting the independence of their brokers, Cetera disagrees. "Our communication seeks to protect our advisors from running afoul of long-standing industry rules," said Chief Risk Officer Joe Neary.

Independence, however, "doesn't mean you're free of restrictions," said Brian Hamburger of Hamburger Law Firm. "You still have to play by the rules. You still have these requirements, regardless of whether you're deemed to be independent or not."

Read more:

Cetera warns brokers that M&A deals require its approval

An object lesson in what not to do when changing firms

They say it's always good to read the fine print, but whether two Charles Schwab brokers did or not before they moved to Morgan Stanley, their alleged breach of contract has cost their new firm $7.3 million.

The FINRA arbitration award against Morgan Stanley and brokers Christopher Armstrong and Randall Keifner is a timely reminder of the adherence to the rules that the industry regulator requires.

"We expect our representatives and firms in the industry to follow their legal obligations to protect customer information," said a spokesman for Charles Schwab. "The panel's award — which included significant punitive damages — is a reflection of why we take such conduct so seriously."

Read more:

Watch those contracts: Lessons from Morgan Stanley's $7.3 million recruiting blunder