FINRA Warns Brokerage Firms are Failing to Comply With Reg-BI Conflicts Issues

Chicago-based Stoltmann Law Offices is representing investors who’ve suffered losses from dealing with financial advisors who’ve had conflicts of interest when representing investors. Is your broker-dealer working in your best interest? Sometimes it’s difficult to tell, particularly when they don’t reveal hidden conflicts. Broker-Dealers who fail to properly inform their clients may be guilty of violating U.S. Securities and Exchange Commission (SEC) regulation “Best Interest (BI).”

In a study conducted by Finra, the federal securities regulator, the agency found that “firms are failing to update their existing policies and procedures to reflect Reg BI’s requirements by “making recommendations that were not in the best interest of a particular retail customer based on that retail customer’s investment profile and the potential risks, rewards and costs associated with the recommendation,” the self regulator said. FINRA also found that brokers and their registered reps “recommended transactions that were excessive in light of a retail customer’s investment profile and placed the broker-dealer’s or associated person’s interest ahead of those of retail customers.”

What should brokers be doing to protect clients? Firms should be “identifying and mitigating conflicts of interest by identifying, disclosing, and eliminating or mitigating conflicts of interest across business lines, compensation arrangements, relationships or agreements with affiliates, and activities of their associated persons,” FINRA said. This means brokers need to “implement policies and procedures to identify and address conflicts of interest, such as through the use of conflicts committees or other mechanisms or creating conflicts matrices tailored to the specifics of the firm’s business that address.” Firms also should be “identifying conflicts across business lines and how to eliminate, mitigate or disclose those conflicts.”

Conflicts are an inherent part of the investment advisory and financial advisory business model.  Under the RIA/fee-based model, those conflicts are greatly reduced, unless they sell products like private placements or annuities, which pay commissions to sellers regardless of your fee-based agreement.  Financial advisors/brokers, who operate on the commission-based compensation model get paid based on how much product they sell to you, and these arrangements are mired in conflicts that must be addressed and adequately disclosed. Reg-BI has been put into place by the SEC to require firms to determine where these conflicts exist, how best to disclose them to clients, and how to prevent them in the first place.

If you invested with a broker-advisor and lost money as a result, you may have a claim to pursue through Arbitration. Please contact Stoltmann Law Offices, P.C. at 312-332-4200 for a free, no obligation consultation with a securities attorney. Stoltmann Law Offices is a contingency fee law firm which means we do not get paid until you do!