FINRA Investigates Conflicts In Broker Pay

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FINRA Investigates Conflicts In Broker Pay

FINRA is examining potential conflicts in interest regarding how firms compensate their brokers. In a targeted exam letter, FINRA asks firms about a number of compensation policies and practices, ranging from payout grids to recruiting incentives and mutual fund fees. Firms were also asked about compensation they get from product sponsors and how they promote particular products or groups 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,” FINRA explained.

FINRA is trying to gather information, rather than looking for violations. The regulator uses these kinds of sweeps to figure out if firms are adequately managing conflicts of interest or if FINRA needs to issue additional guidance.

“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,” said Dan Sibears, FINRA’s executive vice president of regulatory operations-shared services. “We really want to find out if they’ve taken the original guidance to heart.”

Among other things, FINRA asks firms to “describe how current compensation structures balance short-term incentives for registered representatives and clients’ long-term interests.” FINRA also asks about levels of production that entitle brokers to higher compensation or bonuses for generating more revenue and how firms promote sales of particular products. Finally, FINRA asks about policies the firms have implemented to check for conflicts of interest and “how many compensation-related conflict of interest escalations” occurred from August 2014 to July.

Broker compensation is certainly relevant as Washington debates implementing a uniform fiduciary standard. “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,” said Ryan K. Bakhtiari, an attorney with Aidikoff, Uhl & Bakhtiari. “Finra is interested in a similar kind of thing.”

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