Death of a Salesman?

1997’s regulatory, internet, and other pressure on the retail stock broker

By Mark J. Astarita, Esq.

The past year presented a series of events, that have caused great concern for the continued existence of the retail broker and his firm. If the trend we saw last year continues without protest from the retail brokerage community, we may very well see the death of the retail brokerage industry as we know it.

As anyone with even a passing interest in the retail brokerage industry is aware, the pressure on retail operations during 1997 has been enormous, constant, and from a variety of sources.

In 1997 we saw one of the most profound changes in the industry, the expansion of the Internet, both in the scope of information offered to investors, and in the number of investors using the Internet. The most obvious change is in the expansion of online trading. Investors can now place their trades, online, at commission rates as low as $12 a trade.

A less obvious impact of the Internet has been the speed at which information is being made available to investors. Today, investors can subscribe to online news services that will poll traditional news sources, and deliver, with minimal time delays, press releases that were only available to the press and financial professionals. Yesterday, investors received their news from their broker, or a day late in the newspaper. Today, investors can receive that same news within an hour of its release, in their personal email box, without ever speaking to a broker. Additionally, online investors can now subscribe to IPOs, simply by entering an indication of interest at Web sites set up specifically for that purpose.

Brokerage firms, realizing the impact of the Internet, began putting up their own web sites in late 1996, and by the end of 1997 virtually every major brokerage firm has its own web site, to attract customers and to provide information to their customers. Is it a coincidence that virtually every major brokerage firm continues to prohibit their own brokers from using the Internet?

The direct pressure from the Internet is but one attack. The regulators have stepped up the pressure on brokerage firms, retail brokers, and their supervisors, on multiple levels. Aside from the increased level of regulatory oversight, the SEC and the NASD have revised Form U-4 and Form U-5, increasing the amount of information and reportable events. See, Forms in Need of Reform And, in conjunction with that change, have changed the scope of public disclosure, approving the disclosure to the public the details of virtually every complaint letter sent by a customer to a firm regarding the activities of a broker, as well as pending arbitrations that have not been decided.

Abuses of Form U-5 by brokerage firms has continued to be a problem for retail brokers who find themselves with a “dirty” U-5 when they leave their firm. But 1997 brought not a solution to the problem, but further incentives for a vindictive manager to expand the practice by proposing to offer immunity for statements made on Form U-5. If that proposal passes, it will be even more difficult than it has been for brokers to protect themselves from “complaints” that are reported solely to prevent the broker from registering at a competitor, and from taking his accounts with him to a new.

Increased pressure on retail brokers by the SEC and the NASD also comes from increased pressure on branch managers and other supervisors to supervise “problem” retail brokers. While the stated purpose is to increase supervision, the net effect is to prevent and discourage the hiring of a broker who has “yes” answers on their CRD reports, by increasing sanctions on supervisors who hire brokers with disciplinary histories. Coupled with the increased disclosure requirements, and immunity for U-5 statements, this can only result in brokers being less inclined to leave their firms, and firms being less inclined to hire brokers with any disciplinary history.

The NASD has also changed its rules, lowering the permissible commissions in Direct Participation Programs, attempting to close spreads on NASDAQ stocks, and imposing new rules regarding order handling and related issues, all of which have the ultimate effect of increasing regulatory pressure while lowering commissions.

Last year also saw the amazing decrease in the regulation of a segment of the industry, as the mutual funds fought, and won, to decrease the duplicative regulation from the federal and state authorities that was having a financial impact on their ability to conduct business. We also saw the end of multiple regulation of investment advisors.

It appeared for a short period of time during the year that there might be some good news on the regulatory front, and a removal of the multiple regulation by state and federal authorities. But while the SEC and Congress was addressing the problem for the firms, they encouraged an increase in regulatory oversight by the States in the area of retail sales practices. 1997 therefore bore witness to a series of announcements by various state regulators of “crack-downs” and “task forces” to control the activities of retail brokers in their states – all of which is in addition to the increased oversight by the NASD and the Exchanges.

The arbitration arena provided more potential problems for the retail broker. While punitive damage awards are not yet a problem, claims for treble and punitive damage by customers are becoming more frequent, and in New York, where arbitrators have been prohibited from granting such relief since 1976, court decisions during 1997 are moving toward allowing such awards. Since New York law applies to the majority of arbitrations, punitive damage awards could become a serious problem in 1998.

Are we witnessing the slow death of the retail salesman? Other commentators have suggested that a large part of the new regulations are designed to destroy the retail broker, and to ultimately create an investment community where the only retail brokers are those who handle the wealthiest accounts, leaving increased profits for the firms themselves.

While it is doubtful that all of this is a preconceived plan, the combination of these different events may have the exact same effect. More and more brokers are realizing that they are losing customers to the Internet. Because of the speed and availability of information, customers believe that they can do their own research and make their own investment decisions. Lower commissions, more public disclosure of negative (and not necessarily true) information about brokers, and decreasing commission bases will all add to the decline of the retail broker. To make matters worse, there have been reports of at least one brokerage firm that is threatening to fire brokers who are producing less than $225,000 a year!

The financial pressure, coupled with the regulatory pressure, is going to make the coming year a difficult one for the retail brokerage industry. But the situation is not hopeless. The majority of customers still need the services of a full service firm, as they lack the financial sophistication, or simply the time, to manage their investments without professional advise. And ultimately, many of the customers who think they go it alone with a discounter will soon learn the advantages of a full service broker; hopefully before they lose a significant amount of their nest egg.

It will therefore be only a matter of time before the financial pendulum swings the other way. However, the regulatory pressure shows no sign of decreasing, and in fact, 1998 will bring increased regulation and enforcement.

The question is whether the retail brokerage industry will continue to sit idly by and allow regulation after regulation be heaped upon them, without comment or outcry.

Past history says that the 1998 will be another year of registered representatives permitting the regulatory attack, without taking advantage of industry trade groups, and the opportunity for public comment on proposed rule changes. Perhaps the financial pressure will force the retail broker to realize that his existence is in jeopardy, and that it is time to take an active role in insuring his continued existence.

Mark J. Astarita, Esq., a partner in the law firm of Beam & Astarita, LLC, represents financial professionals in a wide variety of matters. He is also the sponsor of The Securities Law Home Page on the World Wide Web ( and can be reached at (212) 509-6544 or by e-mail at This article originally appeared in the January 1998 edition of Research Magazine.


Securities Attorney at Sallah Astarita & Cox | 212-509-6544 | | Website | + posts

Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page -, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.