FINRA’s Broker-Dealer Conflicts of Interest Sweep

Seeking to ensure that broker-dealers identify conflicts and place their customers’ interests above there own, FINRA sent to its member firms, in July, another “Targeted Examination Letter”  announcing that it would be conducting targeted examinations (or sweeps) of  member practices to review how they identified and managed conflicts of interest.  The letter sent to  a number of firms seeks a response by September 14, 2012, followed by a potential three hour meeting to discuss information reported. 

What this exercise means for member firms in the near term and in the future is that any new rules FINRA enacts are likely to have a significant effect on broker-dealers with retail clients, particularly in the areas of best execution and customer order handling.  Firms will need to address whether conflicts exist for topics related to best execution as “internalization” (i.e. agency cross trades orders), “preferencing (directing to one market maker over another), affiliated brokerage (i.e. directing  fund brokerage commissions to brokers that sold large number of fund shares), and the priority of trade execution (i.e. trading ahead of customers, block trading, front running and proprietary trading issues) to name a few.     

FINRA makes explicit that it will not be using information gathered from the sweeps as a tool for potential enforcement actions, but instead is using  responses to better understand whether firms are taking reasonable steps to properly identify, manage and mitigate conflicts that may impact clients and the industry.  The letter also states that FINRA intends to develop potential guidance for the industry from the information it learns.  From a fiduciary perspective, and if  broker-dealers haven’t been doing so, they need to start thinking about creating formal risk assessment programs that address conflicts concerns.

Author: Dexter Johnson

The author is a an attorney who for the past 14 years has concentrated his practice in representing, successfully, investment advisers, broker-dealers, corporations and individuals who are subject to SEC, FINRA, State or other regulations and who may be the subject of regulatory examination, review or investigation. He formerly worked at the SEC. His regulatory and litigation experience has encompassed virtually every type of securities issue in the industry. He has also negotiated favorable outcomes in many of these matters for his clients.