Welcome to the fourth edition of Nightmare on Compliance Street, where I leverage my more than 30 years of experience in compliance supervision and expert witness testimony to address the scariest and toughest-to-answer compliance questions submitted anonymously by Wealth Solutions Report readers.
Let’s get started with this week’s questions!
Question 1: Do I Need to Disclose Unpaid Bills With a Collections Agency?
Dear Sander –
I am a registered representative with an independent broker-dealer. Last year, my wife was hospitalized for a severe illness. We incurred significant medical bills – Way more than we could afford. Unfortunately, these hospital bills are now at a collection agency. Do I need to tell my firm?
Cautious About Collections
Dear Cautious –
Thank you for the question. First of all, I know that as a financial professional, disclosing debt to your colleagues can be often embarrassing but let’s start with the regulatory requirements.
And the regulations do not call for disclosure of bills that are in collection…so, specifically to your question, no worries yet.
Where disclosure is required is when it comes to liens. Listen very carefully – This advice is for everyone: Monitor your credit report for liens!
If you get a lien on your record and you do not report it on a timely basis, FINRA can, and often does, terminate your registration, effectively putting you out of business. Why does FINRA do this?
Their position is this: If you do not update your Form U4 to disclose the lien, you have lied to FINRA and that lie subjects you to statutory disqualification.
If you think that this is harsh, you are right. However, FINRA’s view is the only one that matters. You need to be vigilant, swallow your pride and disclose all liens as soon as you become aware of them.
Question 2: Client Portfolio Disclosure Obligations for Brokerage vs. Fee-Based Accounts
Dear Sander –
I work at a hybrid firm. I am licensed both as an investment advisory representative and a registered representative of a broker-dealer.
Over a year ago, I put together a portfolio at the broker-dealer for a client that consisted of 50% equities and 50% bonds. The client and I agreed to this balanced portfolio. The equities have increased in value such that the portfolio is now 70% equities and 30% fixed income.
What should I do now that the portfolio significantly differs from what my client and I agreed upon? Does my responsibility change if this account is a fee-based account through my RIA?
Out Of Balance
Dear Out of Balance –
Wow! That is great question, with a lot to unpack.
Let’s start with the broker-dealer requirements. Strictly from a regulatory standpoint, you do not have a duty to monitor the account for any changes. Many clients do not understand this, so I always recommend that you contact your clients at least semi-annually to update them on the status of their portfolio. That is a customer service best practice – not a regulatory requirement.
But you need to be prudent. The next time you speak to the client about his/her portfolio, you may say something like, “Everything looks good, I don’t recommend any changes at this time.”
This is the equivalent of a hold recommendation and resets your responsibilities.
If this happens – check the paperwork to be sure it reflects the current status of the account, not the old status. Have the client sign new paperwork. This gives you and your firm evidence of the client’s understanding of the portfolio’s new allocation. While this may seem inconvenient, this small bit of CYA could save you in the future.
Now, do your responsibilities change if the same scenario plays out in a fee- based account? Absolutely!
In a fee-based account, you have the obligation to provide ongoing account monitoring, as well as a fiduciary duty to do what is in the client’s best interest.
When an account falls out of balance, as in this scenario, you definitely have a duty to contact the client to discuss the issue and agree on a new course of action.
Until Next Month…
Thank you for joining me and please keep those questions coming.
I receive a large volume of questions from financial advisors and home office staff, and I do my best to spotlight the questions that are both thorny and widely applicable to the broader industry.
Until next month, this is Sander Ressler, reminding our WSR readers that there are no bad questions – just bad behaviors
Have a compliance dilemma that doesn’t align with a black-and-white answer? Sander can help you navigate the gray areas of compliance – Submit your anonymous queries here: