Oct 24 Wall Street's industry-funded watchdog
wants to learn more about how brokerages are managing conflicts
of interest, including compensation that may motivate brokers to
push certain securities to investors, a top U.S. regulator said
The Financial Industry Regulatory Authority (FINRA) is in
the process of collecting information about conflicts of
interest from 14 brokerages, according to Susan Axelrod, head of
FINRA's member regulation unit.
Meetings between FINRA and representatives from those
brokerages are about to begin, she said during a seminar in New
York hosted by the Practising Law Institute, a group that
provides continuing legal education classes to lawyers.
FINRA began sending written information requests to the 14
firms after its annual meeting in May, Axelrod said. She did not
name the brokerages, but said there were "no specific issues" at
the firms and that FINRA did not intend to bring enforcement
cases through the process. FINRA intends to use its findings to
provide guidance to the securities industry about conflicts at
brokerages and keeping them in check, she said.
The review comes during a challenging economic environment
for brokerages, many of which are steadily losing advisers and
their clients. That could to lead rewarding brokers with
financial incentives to push more products that may not be the
best choice for investors.
Conflicts related to broker compensation are among FINRA's
concerns, Axelrod said at the seminar. For example, brokers
often receive large financial incentives, such as signing
bonuses, to move from one brokerage to another. They may
encourage clients to open accounts at the new firm too by
promising a new and better suite of securities products. But
brokers often do not disclose that they received a financial
incentive to join the firm, she said.
Branch managers whose compensation is based on the total
sales in an office are another concern, she said. The type of
compensation could encourage a branch manager to push brokers
into selling more products, Axelrod said. Brokers may then focus
more on sales, instead of on whether those products are suitable
for clients based on factors such as age and risk tolerance, she
In those situations, FINRA wants to know the types of
procedures and controls in place at brokerages to make sure
brokers are not trying to sell a product "that's going to pay
them out the most," she said.
FINRA is not certain whether it will expand its conflicts
review beyond the current 14 brokerages, Axelrod said. "Let's
see how productive those conversations are."
(Reporting By Suzanne Barlyn; Editing by Tim Dobbyn)