U.S. securities regulators say that brokers need to do a better job of managing conflicts of interest in their business.
The U.S. Financial Industry Regulatory Authority (FINRA) issued a new report that examines conflicts in the brokerage business, which aims to highlight effective practices for managing conflicts that may go beyond current regulatory requirements. The report comes out of a review FINRA initiated in mid-2012 at a number of large firms to better understand how they manage conflicts of interest.
FINRA says that the report is being published to detail best practices, and to help firms strengthen their own frameworks for dealing with conflicts. The regulator notes that, while there is no silver bullet to effective conflicts management, it believes that firms should seek to identify and manage conflicts on an ongoing basis through an enterprise-level approach that is scaled to the size and complexity of the firm’s business.
It calls on firms to establish new product review processes that: include independent perspectives, identify potential conflicts raised by new products, restrict the distribution of products that may pose conflicts that cannot be effectively mitigated, and that they should periodically re-assesses products through post-launch reviews.
Additionally, it says that firms should avoid pressure to favour proprietary products; minimize conflicts in compensation structures, and employ heightened supervision when conflicts persist (around thresholds in a firm’s compensation structure, for example); and, include “best-interest-of-the-customer” standards in codes of conduct, in order to maintain and increase investor trust.
In terms of compensation-driven conflicts, the report says that firms can reduce the incentive for a rep to prefer one fund family over another by capping the credit a rep may receive for a comparable product across providers. It also says that “imposing compensation adjustments on registered representatives who do not properly manage conflicts of interest is an effective practice.”
“While many firms have made progress in improving the way they manage conflicts, our review reveals that firms should do more,” said FINRA chairman and CEO, Richard Ketchum.
FINRA says that it intends to continue to assess firms’ conflicts management practices, and the effectiveness of those practices in protecting customers’ interests, through its examination and oversight programs. “If we find that firms have not made adequate progress, we will evaluate rulemaking to require reasonable policies to identify, manage and mitigate conflicts,” it says.