In the securities industry conflicts of interest can arise where a duty of care or trust exists between two or more parties. While the existence of a conflict does not always mean that one party will be harmed by the other party’s interest, brokerage firms have been involved in many situations where they did not effectively and fairly manage conflicts of interest.
The Financial Industry Regulatory Authority (FINRA) recently issued a “Report on Conflicts of Interest” that focused on enterprise-level frameworks to identify and manage conflicts of interest; approaches to handling conflicts of interest distributing new financial products; and approaches to compensating their associated persons.
Part of FINRA’s focus on conflicts on interests focused on the introduction of new financial products. FINRA recommended a number of effective practices to address conflicts in the issuance of new securities. First, firms can use a new product review process that includes identifying and mitigating conflicts that a product may present. Second, firms should disclose those conflicts in plain English to ensure that customers comprehend the conflicts that a firm or registered representative have in recommending a product. FINRA reminded firms that conflicts may be particularly acute where complex financial products are sold to less knowledgeable investors, including retail investors.