The Financial Industry Regulatory Authority is warning broker-dealers in a new report that if they fail to implement fiduciary-like methods to better manage their conflicts of interest, a new disclosure rule may be in the offing.
FINRA developed its conflicts report after a year of gathering firms’ responses as part of the self-regulator’s conflicts initiative, which it launched last July.
The report notes conflicts of interest among BDs have improved, but points to three “critical” areas where BDs still need to make headway: firmwide frameworks, new products and compensation practices.
FINRA notes in its report that while areas of conflict have been addressed via rulemaking, oversight and enforcement action by both FINRA and the Securities and Exchange Commission, the report “carries those efforts forward” but does not create any new legal requirements or change any existing regulations.
However, FINRA noted in releasing the report that “FINRA will continue to review how firms manage conflicts and evaluate the effectiveness of firms’ efforts. If we find that firms have not made adequate progress, we will evaluate rulemaking to require reasonable policies to identify, manage and mitigate conflicts.”
Indeed, industry officials speculated that the report could well serve as the basis for a number of rules or changes or replacements to existing rules. After all, Ketchum warned at FINRA’s annual conference in May that if the SEC failed to “act quickly” to finalize a rule to put brokers under a fiduciary mandate, that FINRA would “look hard” at issuing “an additional disclosure rule with respect to broker-dealer firms.”
Jon Henschen of the BD recruiting firm Henschen & Associates says the recommendations in FINRA’s conflicts of interest report “paint a picture of fiduciary without coming out and saying it.”
Henschen notes that while BDs “have come a long way in transparency, there remain numerous areas that are opaque or hidden from not only clients but representatives as well.”
For instance, he says that “firms with proprietary products can no longer require reps to sell their products, but they can indirectly sway them to proprietary products through restriction of wholesalers of competing products from initiating contact, as well as restricting competing products from having a presence at conferences or on the firm website.” He adds that “proprietary advisory platforms, which can be a major profit center for broker-dealers, can also get center light while third-party money managers are marginalized or hidden from view.”