RIA Compliance Consultants
Monday, October 06, 2008

Identifying and Handling Conflicts of Interest

Recently, FINRA published a webcast on identifying and handling conflicts of interest. Conflicts of interest may arise any time that the interests of a registered representative or investment advisory representative compete with the interests of their customers. This post will summarize the FINRA webcast, as conflicts of interest is an important issue that affects both registered representatives affiliated with a broker-dealer only, as well as investment advisory representatives affiliated with a registered investment adviser.

FINRA has stated that it recognizes conflicts of interest are unavoidable in the securities industry and if not properly managed, conflicts of interest can harm a representative’s business and reputation, as well as lead to regulatory violations. To avoid these harms, it is critical that representatives both identify and address potential conflicts of interest. FINRA pointed out that it has several rules designed to address conflicts, such as its rules addressing the giving of business gifts, working as a research analyst, preventing trading conflicts, preparing fairness opinions, conducting outside business activities, and sales practice rules regarding suitability and communications with the public. While the SEC does not have the same specific rules as to investment advisory representatives, the conflicts of interest principle underlying these FINRA rules equally applies to investment advisory representatives, and the SEC has made its intention clear through various No-Action Letters that it expects registered investment advisor firms to have and investment advisory representatives to follow procedures addressing conflicts of interest.

FINRA commented that many, if not most, FINRA disciplinary actions involve conflicts of interest issues and noted that violations involving conflicts of interest include, for example, violations regarding suitability, false and misleading communications, and trading violations. Also, FINRA stated that conflicts commonly arise regarding recommendations to buy or sell securities and regarding compensation arrangements. FINRA stated that a common conflict is the temptation for a representative to recommend a product based on the representative’s receipt of higher compensation or based on pressure for a representative to recommend proprietary products. Compensation arrangements which pay based on the volume of business a representative directs to a particular product sponsors was another example of a common conflict. FINRA reminded that per the FINRA Suitability Rule representatives are required to make sure that recommendations to a customer are suitable. As investment advisor representatives, fiduciary responsibility requires that interests of customers are put above the investment advisor representative’s own interests. FINRA suggested that representatives can minimize both reputation and regulatory risks resulting from conflicts of interest by always putting their customer’s interest before their own. Additionally, FINRA stated that disclosure can help mitigate conflicts by making sure that customers have the information that is necessary to fairly evaluate recommendations from their representative.

RIA Compliance Consultants, Inc. can help you with questions you may have about identifying, addressing, or disclosing conflicts of interest. Please contact us if you would like more information about our services.


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posted by bhill at 2:19 PM



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