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The New Books and Records Rules

A Million Little Headaches

February 27, 2006
By John Hintze, Correspondent

Sometimes life's challenges are urgent, and sometimes they sneak up over the years until the realization hits that there's much to do in little time. The latter scenario applies to the Securities and Exchange Commission's new books-and-records requirements, which are approaching the end of their three-year implementation period and are putting the brokerage industry in a tizzy that may prompt its main trade group to ask regulators to exclude certain types of accounts from the looming deadline.

The new rules require brokerages to send account information for customer approval 30 days after an account is opened or a change is made in customer investment strategy, or every three years.

The Securities Industry Association (SIA) has sponsored conference calls among members every few weeks since December to share tips about implementing the requirements by the May 2 deadline. Members prompted those calls, according to Rob Gannon, VP of management services at the SIA, and depending on the nature of the specific topic, there have been 30 to 50 participants per call.

Gannon said in early February that the SIA was unlikely to ask for another extension--the three-year extension after the new rules became effective in 2001 makes another one unpalatable for the regulators, industry observers said. Nevertheless, the industry has had to deal with a slew of compliance issues since 2001--from mutual fund breakpoints to the USA Patriot Act--that have strained its available resources.

Gannon said the SIA is talking to the regulators about these challenges and discussing internally whether to seek a "clarification" of members' responsibilities with respect to certain accounts. "We're considering whether to seek clarifications as to whether these types of accounts fall within the 36-month requirement to update customer information and suitability--whether they fall within the intent of the rule," Gannon said.

The accounts in question are those that are largely held away from the broker-dealer, such as 529 plans, variable annuities, 401k plans and mutual funds that brokers hold directly at the product providers, known as check and application business, or more commonly as "check and ap."

Ensuring that these types of accounts comply with the new books-and-records rules is an operations challenge all by itself. The information brokerages are required to update consists of basic data about the customer including name and address, investment suitability and goals. Meeting those requirements is less problematic for investment assets in custody at the brokerage, where the information is readily available.

Check-and-ap business, however, is a different ball game. In many cases, brokers helped clients open accounts directly at, say, a mutual fund company, saving brokers the clearing firm charge. The brokerages kept copies of the new account forms, but customers then proceeded to deal directly with the providers. When customers bought more shares or changed address, they often didn't tell the brokerage firm, leaving its data scant and outdated.

In addition, when reps left the brokerage firm, inactive or smaller accounts that the rep decided to leave behind may have become "orphaned," or left unattended at the brokerage firm. In fact, even if the broker remained, forms for such accounts were often forgotten in file cabinets. So the first step in complying with the new rules is finding the manpower to remove the documents from cabinets, determine what information is missing, and send forms out to customers to be updated.