Welcome to the post-Madoff world.

On January 15, FINRA, the Financial Industry Regulatory Authority, contacted a select number of broker/dealers with requests for information about their RIA units. According to the official document, FINRA also requested information about customer referrals to their RIA units and customer referrals to any Madoff entity for the period of January 1, 2006 through December 31, 2008. Furthermore, the FINRA document specifically asks firms if they recommended that any customers buy any security invested wholly or in part in Madoff-managed investments. Responses are due by February 6. A FINRA spokesperson could not disclose the number of firms contacted, and could not comment on the information request.

Sure, FINRA routinely seeks information from firms to follow market trends and sales practices. But this request may signal the beginning of a tougher regulatory regime governing b/d-run RIAs and, more generally, managed investments.

"Most of the people from NAPFA [National Association of Personal Financial Advisors]—we're all RIAs—are seeing more concern about the Madoff scandal and other Ponzi schemes," says Marc Schindler, founder of Pivot Point Advisors in Bellaire, Texas. To calm client fears post Madoff, Schindler sent around a letter to clients reiterating Pivot Point Advisors' asset management practices, and the protections it has in place to prevent such disasters.

It is still too early to say exactly what regulatory actions b/ds and RIAs will face as a result of FINRA's frisk. Many b/ds allow their dually registered advisors to operate out of RIAs they have set up themselves, and these b/ds may feel pressure to discontinue this practice because of the potential compliance risks. But other b/ds have long forced their dually registered advisors to use an in-house RIA, operated by the b/d itself.

Take independent b/d Cambridge Investment Research Inc. of Fairfield, Iowa. Its dually registered advisors operate 160 outside RIAs. Although not called upon for information in this particular FINRA survey, Cambridge CEO Eric Schwartz says the b/d carefully monitors its RIAs, going well beyond the scope of required oversight. FINRA's Notice 94/44 governs the supervision of dually registered individuals. The notice recommends that b/ds supervise any investment advisor who engages in selling away, and who participates in—and is compensated for—the execution of trades. Historically, Schwartz says Cambridge has not allowed affiliated RIAs to refer client money to hedge funds unless these funds have been approved under the b/d's due diligence process.

Schwartz thinks b/ds have two options: Get more aggressive about supervising reps—beyond what is recommended by 94/44—or stop allowing reps to operate as investment advisors outside the corporate RIA. But he worries that neither option will appeal to b/ds. "There is such a strong trend towards outside RIAs, it will be hard to go backwards once you have the genie out of the bottle, so I think what is going to happen in some cases is that people are going to put their head in the sand," says Schwartz.

A growing regulatory burden has already forced some independent RIAs to return to their corporate RIA umbrellas over the last couple of years. Pete Bush, co-founder and a partner of Horizon Wealth Management, LLC, based in Baton Rouge, La., says the compliance burdens of operating an independent RIA became so overwhelming that after about four years, they ended up folding themselves into the corporate RIA of the b/d Multi Financial, one of ING's b/ds. "I think things like the Madoff scandal are certainly going to put an eye towards the b/ds, and I think you'll see more b/ds requiring reps that are dually registered to be under their corporate RIA," says Bush.

What kinds of problems could the FINRA investigation uncover? Maybe it will find out that a b/d hadn't disclosed to FINRA that it runs an RIA, says Brian Rubin, a partner of law firm Sutherland and former deputy chief counsel with the NASD's enforcement department. FINRA may also want to make sure b/ds are complying with Rule 2110, which requires members to conduct business in accordance with just and equitable principles of trade, he says. FINRA can "basically apply the rule to anything they want. So if they see activity they're not comfortable with—even if there is no specific rule on the issue—they can apply [Rule 2110]," says Rubin.

Meanwhile, independent b/d advocacy groups such as the Financial Services Institute (FSI), are already working with regulators to ensure that increased regulation won't jack up costs to member firms and clients."We entered this time of increased regulatory scrutiny with an already significant regulatory and compliance burden," says Dale Brown, president and CEO of the FSI management team. "We're very concerned this is a reaction/overreaction to both the market meltdown and the Madoff scandal that is just going to throw more cost and more burden onto firms—and the ultimate loser in that is the investor who needs access to the indie RIAs."