FPA casts wary eye on principal trades

The Financial Planning Association today issued a consumer brochure describing the “potential, looming problem” with principal trades by brokers.
“Principal trades represent a unique conflict of interest for the broker,” said the brochure, titled “Consumer Tips on Buying Stocks and Bonds Owned by Your Broker’s Firm.”
Under a two-year rule adopted last month by the Securities and Exchange Commission, brokers with fee-based accounts can continue to make principal trades, which are sales made from a brokerage firm’s own inventory.
The ability of brokerage firms to make such trades was called into question when an appeals court ruling last March overturned the SEC’s rule exempting brokers who have fee-based accounts from registering as investment advisers.
The suit was brought by the FPA.
The court’s decision overturning fee-based brokerage accounts takes effect today.
The SEC temporary rule is last through 2009.
“There’s absolutely nothing inherently wrong with principal trading,” FPA president Nicholas Nicolette said in the FPA release.
“However, when shares are owned by the firms, consumers also need to be aware of the potential for abuse where a firm might make an effort to dump shares that are declining, or poised to decline in value on unsuspecting customers,” he said.
“Consumers need to be aware of the impact principal trades can have on their financial well-being,” said Mr. Nicolette, who is president of Sterling Financial Group in Sparta, N.J.

Related Topics: Financial Planning Association (FPA)