One of the priorities of the SEC National Examination Program is dual registrants; entities that provide both brokerage and investment advisory services.  The focus of the program on dual registrants begs the question why a firm would want to be one. 

The answer to that question should be an obvious.  Being a dual registrant allows a firm to offer traditional brokerage services while, at the same time, offer investment advisory services.  In other words, a one stop shop. 

The key is being a dual registrant is balancing the regulatory scheme applicable to both.  A retail brokerage is subject to the suitability rule, but an investment advisor us subject to a fiduciary duty.  Balancing these not entirely consistent principles can be a challenge. 

The SEC when it announced its 2014 exam priorities said it would focus on dual registrants because it is concerned that recommendations not be made based upon the revenue potential to the firm, rather than the best interests of the client. 

The National Exam Program has identified significant risks to investors of migration and other conflicts presented by this business model.  The SEC examinations will focus on the impact to investors of varying supervisory structures and the legal standards governing that firm’s conduct.

How is such a firm to address this heightened exam priority?  These firms should have enhanced compliance policies to address things like best execution, cross-trading, self-dealing, and other conflicts of interest issues.  Doing so may mean the difference between a fairly vanilla SEC exam, and having root canal.  *

* photo from freedigitalphotos.net