FINRA Proposes Broadening Exception to Principal-Approval Rule Regarding Bulk Orders by Investment Advisers
Commentary by Steven Lofchie
FINRA has proposed broadening the exception to the principal-approval rule to cover all bulk orders by investment advisers, regardless of when allocation instructions are received, not just those received by the end of the trade date.
FINRA Rule 4515 (Approval and Documentation of Changes in Account Name or Designation) requires a broker-dealer principal to review and approve where an adviser allocates a bulk trade after the end of the trade date. The requirement is intended to prevent an adviser from assigning winning trades to favored clients.
The organization justified the proposal by explaining that: (i) most firms now use straight-through processing and that a requirement of manual review interrupts that automated flow, (ii) same-day allocation rates exceed 98 percent, so relatively few allocations occur after the trade date, (iii) a one-time review of a late allocation is not enough to detect cherry picking, which would require pattern analysis, and (iv) manual review is made more difficult by a move to one-day settlement.
FINRA also pointed out that advisers still owe a fiduciary duty under the Investment Advisers Act, and that FINRA Rule 4515.01 still bars brokers from knowingly helping an adviser allocate against that duty or intent.
Commentary
Broker-dealers have enough compliance issues as to their own conduct without being obligated to monitor the conduct of advisers, which are also regulated entities. This is a good step in taking a burden off the broker-dealers. Monitoring the advisers should generally be left to the SEC or state regulators.