More On Legal & Compliancefrom The Advisor's Professional Library
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
The Financial Industry Regulatory Authority (FINRA) has launched a conflict-of-interest sweep, and is telling broker-dealers to compile a bunch of information and prepare for face-to-face meetings with FINRA exam personnel.
FINRA says the sweep is just a way to “better understand” BDs current practices, but lawyers with BD clients suggest potential enforcement actions may be brewing.
In a July targeted examination letter, FINRA told BDs it is reviewing how firms identify and manage conflicts of interest, and as part of the review FINRA examiners want to meet with executives and compliance staffers to discuss the firm’s approach to “conflict identification and mitigation.”
“At the meeting, we would like your firm to present on, among other conflicts related topics, the most significant conflicts your firm is currently managing and the processes in place to identify and assess whether business practices put your firm’s—or your employee’s—interests ahead of those of your customers,” FINRA said in the letter.
To prepare for the meeting, BDs must submit the following information to FINRA by Sept. 14:
- Summary of the most significant conflicts the firm is currently managing.
- Names of departments and persons responsible for conducting conflicts reviews.
- Summary of the types of reports or other documents prepared at the conclusion of a conflicts review.
- Names of departments and persons who receive any final report or other documentation summarizing a conflicts review.
- Available dates and times in the fourth quarter of 2012 that executive management of your firm can meet with FINRA staff for approximately three hours to discuss the firm’s approach to conflicts of interest.
While the inquiry “is not an indication that FINRA has determined that your firm has violated any rules or regulations,” FINRA told BDs, it says the goal is to “better understand industry practices and determine whether firms are taking reasonable steps to properly identify and manage conflicts that could affect their clients or the marketplace.” Knowing what firms do to address conflicts and the challenges they face, FINRA said, “will help FINRA develop potential guidance for the industry and determine other steps FINRA could consider taking in this area.”
But Doug Cohen, counsel in the Investment Management Group at Lowenstein Sandler in New York, says that “conflicts of interest are a complicated, industrywide issue and most firms would welcome additional guidance from FINRA.” FINRA’s sweep, he says, “looks an awful lot like an examination and FINRA getting ready to play ‘gotcha.’”
Brian Rubin, a partner with the law firm Sutherland, says FINRA’s letter is “odd” in several respects. First, he says, “the purpose is unclear. Is FINRA thinking about new rules or does it have concerns about violations of existing rules? The letter doesn’t clearly say.”
Instead, he continues, the letter talks about "developing potential guidance and determining ‘other steps,’ which could mean enforcement actions.”
Also, Rubin says, “sweep letters normally don’t come from the heads of Market Regulation. Normally, they are sent out under the names of staff people.” And, another oddity, he says, is that sweep letters “usually ask only for documents and information. Here, FINRA is also requesting a three-hour meeting with executive business and compliance staff.”
Finally, “despite saying that there’s no indication of violations, the letter asks firms to identify their most significant conflicts. The CCO of one BD said that question was similar to ‘When did you stop beating your spouse?’”