Finra is taking a closer look at potential conflicts of interest in how firms pay their brokers.
In a targeted exam letter,
the Financial Industry Regulatory Authority Inc. queries firms about a broad range of compensation practices, from the common payout grids, which determine how much of their annual revenue their brokers take home, to recruiting incentives and mutual fund fees. The questions also ask the firms about the compensation they receive from product sponsors and how they promote specific products or categories of products.
“The intent of this 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,” the regulator wrote.
The letter, which is going out to about a dozen firms, is designed as an information-gathering exercise rather than aimed at finding violations, according to Finra's executive vice president of regulatory operations-shared services, Dan Sibears. Finra often uses the sweeps to determine whether firms are properly managing conflicts of interest or if the regulator needs to issue additional guidance.
This sweep is a follow-up to
a report from October 2013 that looked at compensation practices more generally.
“It is really designed to determine whether practices around compensation or certain products that are sold are being sold for the right reason and there are not compensation incentives that could lead to products being pushed to investors that are not in their best interest,” Mr. Sibears said. “We really want to find out if they've taken the original guidance to heart.”
Finra generally does not use the exam responses to take enforcement action, unless the violations are egregious. The regulator has used the sweeps to generate reports on other topics, including cybersecurity and social media.
In this letter, Finra asks firms, for example, to “describe how current compensation structures balance short-term incentives for registered representatives and clients' long-term interests.”
The letter also seeks information about production thresholds that entitle brokers to higher compensation or bonuses for generating more revenue, enhanced compensation tied to revenue from particular product types, how firms promote sales of specific products, and other concerns. It then asks firms what policies it has in place to monitor for conflicts of interest and “how many compensation-related conflict of interest escalations” occurred from August 2014 to July.
But there is gray area around what constitutes a conflict of interest when it comes to compensation, according to compensation consultant Andrew Tasnady of Tasnady Associates.
“Is it a conflict of interest to encourage your salespeople to go out and get new clients and new assets and call them up about their financial situations?” he said. “I find it hard to see where these definitions are exact.”
Still, compensation is a key focus right now, particularly as some regulators look at the possibility of implementing a uniform fiduciary standard, according to Ryan K. Bakhtiari, an attorney with Aidikoff, Uhl & Bakhtiari.
“I think about it in the broader context of what's going on in Washington with the Department of Labor's fiduciary rule and the potential for conflict disclosure,” Mr. Bakhtiari said. “Finra is interested in a similar kind of thing.”
The regulator has focused on some of these areas before, and earlier this summer sought comment on a
revised proposal to require brokers to make additional disclosures to clients about the incentives and bonuses they are paid to move firms.
Responses to the letter are due by September 18.
