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FINRA Sweeping BDs on Comp Practices

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The Financial Industry Regulatory Authority is sweeping broker-dealers for information on conflicts of interest they have related to their compensation practices.

The self-regulator wants BDs to answer 19 questions in writing by Sept. 18. The scope of FINRA’s review is limited to a firm’s retail accounts, and will cover activity between August 2014 through July.

As FINRA stated in its Annual Priorities Letter, “conflicts of interest represent a recurring challenge that contribute to compliance and supervisory breakdowns which can lead to firms and registered representatives, at times, compromising the quality of service they provide to clients.”

While FINRA states that it has “observed instances of positive change since we issued the Report on Conflicts of Interest in October 2013,” the intent of the current review is “to continue our assessment of the efforts employed by firms to identify, mitigate and manage conflicts of interest, specifically with respect to compensation practices.”

FINRA wants to know how compensation policies for registered reps and supervisors are reviewed and approved and what role the board has, for both individual packages and the firm as a whole. It also asks about how firms identify compensation-related conflicts of interest and the controls used to manage those conflicts (e.g., neutral grid, fee-capping, compensation penalties). It asks firms to describe how pay policies balance short-term incentives for brokers with clients’ long-term interests.

FINRA also asks firms to describe how products approved for sale are displayed or otherwise communicated to registered reps. For example, are products presented by product category (e.g., mutual fund or annuity)? Is an internal search feature available?

Jon Henschen, owner of the broker-dealer recruiting firm Henschen & Associates, says that advisors are “scrambling to find products that are not a conflict of interest with some reps leaving commissionable mutual funds and going to [unit investment trusts] as a way of annuitizing their business.”

Because “every area of our industry is getting drilled down on,” he continues, reps are “having a difficult time coming up with a product mix that will not be problematic.  The transactional active stock trader model is quickly dying on the vine and rightly so, but many other commission-based models are becoming a playground for securities attorneys and FINRA audits.”

He argues that regulators are treating the BD industry as if “we are moonshiners; They allow us to continue to operate as long as we pay their extortion money, i.e. FINRA fines. Between compliance rules and company policies becoming so complex and convoluted, many times advisors have difficulty discerning if they are doing something wrong.”

— Check out FINRA Floats ‘Watered Down’ BrokerCheck, Broker Bonus Rules on ThinkAdvisor.