This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Securities Regulator Targets Broker Conflicts of Interest

By Hal M. Bundrick

NEW YORK (MainStreet) ¿ Brokerage firms need to do a better job of identifying and managing conflicts of interest. FINRA, the self-regulatory body of the securities industry, has reviewed a number of large brokerage firms and is urging the industry to become more proactive in protecting investors and minimizing cross-interests.

"While many firms have made progress in improving the way they manage conflicts, our review reveals that firms should do more," says FINRA Chairman and CEO Richard G. Ketchum. "FINRA will continue to assess firms' conflicts management practices and the effectiveness of those practices in protecting customers' interests through its examination and oversight programs."

FINRA says that to better serve clients' interests, firms should implement an approach that begins with a "tone from the top" ¿ a priority to address conflicts that filters though an organization's structures, policies, processes, training and culture.

Selling "house" investment products can present the greatest potential for self-serving benefits and FINRA encourages firms to establish "new product review processes that include perspectives independent from the business proposing products, that identify potential conflicts raised by new products, that restrict distribution of products that may pose conflicts that cannot be effectively mitigated and that periodically re-assesses products through post-launch reviews."

The regulators also believe that to reduce conflicts, broker-dealers with private wealth businesses should operate with appropriate independence from other business lines within a firm.

FINRA is encouraged by firms' general adoption of open product architectures (i.e., the sale of third party in addition to proprietary products) but says brokers should not be pressured to favor proprietary products through sales bonuses and compensation structures that add to potential conflicts of interest.

"Registered representatives still have an incentive to favor products with higher commissions because these produce larger payouts," FINRA says. "Firms should disclose those conflicts in plain English, with the objective of helping ensure that customers comprehend the conflicts that a firm or registered representative have in recommending a product. These conflicts may be particularly acute where complex financial products are sold to less knowledgeable investors, including retail investors."

Matters regarding conflicts of interest are taking a high priority in the investment services industry, as the SEC considers the roll-out of a comprehensive and consistent fiduciary standard of care.

While simply making suggestions now on how brokers should manage conflicts of interest, FINRA says the advice could become regulation later.

"If we find that firms have not made adequate progress, we will evaluate rulemaking to require reasonable policies to identify, manage and mitigate conflicts," the FINRA report says.

--Written by Hal M. Bundrick for MainStreet

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
AAPL $126.37 0.00%
FB $83.20 0.00%
GOOG $552.03 0.00%
TSLA $190.57 0.00%
YHOO $44.95 0.00%


DOW 17,976.31 +263.65 1.49%
S&P 500 2,086.24 +25.22 1.22%
NASDAQ 4,947.4410 +56.2220 1.15%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs