Finra collecting conflict-of-interest data from 14 firms

Ketchum says seeking 'serious exposure' and best practices

Mar 15, 2013 @ 11:48 am

By Mark Schoeff Jr.

The brokerage industry's regulator is collecting information from 14 large firms regarding potential conflicts of interest related to compensation and product sales in an effort to flag problems and highlight best practices.

“We're looking both to identify anything that we think is a serious exposure to investors and also to identify best practices, and give feedback to the firms and encourage adoption,” Rick Ketchum, chairman and chief executive of the Financial Industry Regulatory Authority Inc., said in an interview after he addressed a Consumer Federation of America conference in Washington yesterday.

Mr. Ketchum did not indicate which firms have been participating over the past several months. The findings will be posted on Finra's website by June, Mr. Ketchum estimated.

“We'll name firms if they've got a serious problem and we have an enforcement action,” Mr. Ketchum said. “Otherwise, our effort outside of that will be to show best practices and try to encourage increased controls.”

The review is designed to assess how the firms manage conflicts of interest and whether those conflicts — related to internal or third-party compensation, as well as proprietary-product sales — hurt investors.

“Knowing what firms do to address conflicts and the challenges they face also helps us determine whether Finra should issue guidance to the industry or consider other steps to improve how conflicts are addressed,” Mr. Ketchum said in his speech.

He said that brokers should act in the best interests of their clients, which would be a higher standard than the suitability requirement that currently governs the sale of investment products.

Last year, Finra overhauled the suitability standard, adding more client care obligations.

In his speech at the CFA event, Mr. Ketchum challenged brokers to put down in writing both the worst-case scenario for an investor if he or she buys a certain product and to articulate why the product is in their best interests.

“What is clear is that the culture has to evolve with respect to firms being able to document that their recommendations are in the best interest of investors,” Mr. Ketchum said.

“It is a simple task. It is not an impossible task. It is a revolutionary change in the way securities are marketed and sold, if it does get incorporated.”

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