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FINRA Releases Report on Conflicts of Interest

By Jessica Antoniades of Shustak Reynolds & Partners, P.C. posted on Thursday, October 17, 2013.

The Financial Industry Regulatory Authority (FINRA) released a new report regarding conflicts of interest in the broker-dealer industry. FINRA began working on the report last year, when it started gathering data from 14 large firms regarding compliance procedures in place to monitor and prevent conflicts. The report urges broker-dealers to manage conflicts by closely managing broker compensation and reviewing new financial products. Also, when firms identify potential conflicts regarding new products, “plain English” disclosures are preferred. Clear, plain English disclosures may avoid the problems of less knowledgeable investors misunderstanding potential conflicts with complex financial products.

FINRA also addresses broker compensation practices in the conflicts report. Conflicts may arise when compensation practices creates incentives for registered representatives to prefer one type of product over another. The report advises broker-dealers to adopt and follow compliance procedures to identify and avoid conflicts that arise in the normal course of business. The report identifies “product agnostic” compensation grids, also known as “neutral grids,” as well as capping the credit a registered representative may receive for comparable products as two potential methods of reducing potential conflicts relating to compensation.

Shustak Reynolds & Partners, P.C. has litigated a wide variety of disputes involving investors, registered representatives and broker-dealer misconduct. If you have a business or securities law concern, please contact us at 619.696.9500 or [email protected]

A full copy of the report is available on the FINRA website. Financial Industry Regulatory Authority, Report on Conflicts of Interest (Oct. 2013), http://www.finra.org/web/groups/industry/@ip/@reg/@guide/documents/industry/p359971.pdf.

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