Dual Registration Dilemma: Navigating FINRA & SEC Regulatory Shifts

Over the past decades, the financial advisory landscape has been experiencing a significant transformation with the rise of hybrid advisor-brokers who are registered with both the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). This dual registration trend has attracted the attention of regulatory bodies, leading to increased scrutiny of economic incentives and potential conflicts of interest among advisors. 

Amidst this evolving regulatory environment, AdvisorLaw emerges as a valuable partner for advisors contemplating transitioning from dual FINRA and SEC registration to becoming solely registered with a registered investment advisor (RIA). This blog will delve into the current regulatory landscape, the challenges faced by dual registrants, and how AdvisorLaw can facilitate a seamless transition.

The SEC’s 2024 Examination Priorities

The term “dual registrants” refers to financial professionals who are registered both as an investment adviser representative and as a registered representative of a broker-dealer. As these individuals or firms serve in both capacities, this type of registration may no longer be necessary to meet client needs. Additionally, it can be costly and time-consuming, as you must satisfy both regulatory bodies. 

The recently issued 2024 examination priorities report from the SEC emphasizes the SEC’s growing concerns surrounding dually-registered advisors. The report indicates a significant shift in focus, stating that examiners will closely scrutinize economic incentives and conflicts of interest among advisors with dual registrations. The specific areas of concern include the use of affiliated firms for client services and the servicing of both brokerage customers and advisory clients by financial professionals.

One of the key points of scrutiny is whether dual registrants recommend investments, proprietary products, and affiliated service providers when more cost-effective options are available. This highlights the SEC’s responsibility of ensuring that clients receive advice that genuinely serves their best interests, without being influenced by financial incentives.

Regulatory Focus On Conflicts Of Interest

In recent years, conflicts of interest have become a focal point for regulatory bodies overseeing the financial advisory industry. While conflicts of interest have always been a concern, regulators are adopting a more meticulous and exacting approach to address these issues in 2024. This increased emphasis on conflicts of interest applies to both investment advisers and broker-dealers — creating a regulatory landscape that is becoming increasingly stringent, especially for dual registrants. Regulators claim concern that these advisors may inadvertently prioritize one set of clients over the other, due to differing compensation structures.

The Surge Of Dually-registered Advisors

In recent years, the number of advisors registered as both brokers and investment advisors has exceeded the count of broker-only representatives. According to FINRA’s industry snapshot for 2023, there were 312,317 dual registrants, compared to 308,565 with only a brokerage license. Hybrid firms continue to proliferate, attracting further regulatory attention.

FINRA’s Concerns

During FINRA’s annual conference in May, officials expressed concerns about compliance violations among dual registrants. Chris Kelly, interim head of enforcement at FINRA, highlighted a practice which he referred to as “BD-IA arbitrage.” This occurs when dual registrants sell high-commission products in a brokerage account and then swiftly convert them into an advisory account with an annual fee. While Kelly noted that it is likely only a “small number” of brokers who engage in such practices, the increasing prevalence of dual registrants has brought this issue into focus.

AdvisorLaw: Your Partner In Transition

Amidst the evolving regulatory landscape and heightened scrutiny, AdvisorLaw emerges as a critical ally for advisors considering a transition from dual registration to sole RIA status. Here are some key ways that AdvisorLaw can assist:

  1. Regulatory Expertise: AdvisorLaw maintains a team of experts who are well-versed in SEC and FINRA regulations. They can guide you through the transition process and advise on compliance with the latest rules and regulations.
  2. Compliance Solutions: AdvisorLaw can help you establish an RIA firm with robust compliance systems and policies that align with your new status as an RIA, reducing regulatory risks.
  3. Conflict Of Interest Mitigation: AdvisorLaw can assist in evaluating and addressing conflicts of interest within your practice, keeping your clients’ interests paramount.
  4. Documentation & Reporting: The transition process involves significant paperwork. AdvisorLaw can help you navigate this process efficiently and accurately.
  5. Ongoing Support: AdvisorLaw provides ongoing support to keep you updated with the evolving regulatory landscape, positioning your practice to remain compliant.

As dual registration continues to attract regulatory scrutiny, advisors must consider their options and make informed decisions regarding their registration status. AdvisorLaw offers a supportive and expert-driven approach to facilitate this transition, helping advisors to confidently navigate the evolving regulatory environment while upholding their commitment to serving clients’ best interests. 

Whether you choose to remain dually-registered or become solely an RIA, AdvisorLaw can provide the guidance and support that you need to thrive in the future financial advisory landscape.

Contact us today for a complimentary consultation. 

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