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.

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