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 on Wednesday.
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 said.
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)