In an effort to manage conflicts of interest more efficiently at brokerage firms, Financial Industry Regulatory Authority (FINRA) recently proposed closer monitoring of broker compensation practices, and the evaluation of new financial products.
FINRA initiated a review of 14 firms to evaluate certain financial incentives including, commission-based compensation, which could lead to conflicts of interest between the broker and the client. Commission-based compensation could motivate a broker to recommend certain financial products that may be unsuitable investments. One of FINRA’s objectives is to collect information about the regulation that the firms have in place in order to prevent brokers from acting on behalf of their own interests rather than focusing on their client’s needs. Additionally, FINRA’s evaluation reviewed the procedures and controls firms have in place for their brokers in order to prevent them from making unsuitable investment recommendations for clients.
Based in this review, FINRA will determine whether broker dealers are implementing proper controls at their firms in order prevent conflicts of interest. If dealers are not in compliance FINRA will evaluate policies in order to identify, manage and mitigate conflicts of interest, according to Reuters.
FINRA has already released some initial proposals. FINRA encourages firms to simplify the language used when describing their financial products. Complicated financial products are often difficult to understand, especially for an investor who is not very experienced. Simplifying the language will make it easier for client’s to comprehend financial products and determine whether they are suitable investments. Moreover, FINRA proposes to cap the commission and fees a broker can make for similar financial products across different providers.
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