Broker-dealers need to do more to prevent conflicts of interest, Wall Street’s industry-funded watchdog says in a new report.
The Financial Industry Regulatory Authority Inc. identified dozens of potential conflicts that were outlined by broker-dealers the regulator surveyed, ranging from managers who spend more time on revenue-generating activities than supervision, compliance staff subjected to pressure from sales management to protect high-producing advisers and registered representatives recommending fee-raising transactions without regard to their suitability for clients.
“While many firms have made progress in improving the way they manage conflicts, our review reveals that firms should do more,” Finra chairman and chief executive Richard G. Ketchum said in a news release. “To help firms analyze the conflicts they face and implement a conflicts management framework appropriate to the size and scope of their business, we are publishing examples of how some large broker-dealer firms address conflicts.”
In the report, Finra called compensation a “major” source of conflicts of interest.
“The rewards firms offer associated persons may influence their behavior in ways that affect customer interests,” the organization said, adding that it focused on four specific areas it said could “create, exacerbate or mitigate compensation-related conflicts of interest.” The areas included compensation for brokers, surveillance and supervision of registered representatives as they approach compensation thresholds, compensation for supervisory personnel, and deterrents to poor conflicts management.
The
report recommends that firms include independent voices when new products are pitched, maintaining the independence of their wealth management businesses and creating disclosures that allow clients to see what factors affect the performance of financial products they are sold.
Finra started its review of firms’ conflict management practices in July 2012.
