Conflicts of Interest
Conflicts of interest represent a recurring challenge that contributes to compliance and supervisory breakdowns. These breakdowns can compromise the quality of service that firms and representatives provide to their clients. We issued the Report on Conflicts of Interest in October 2013, and FINRA continues to monitor the efforts employed by firms to identify, mitigate and manage conflicts of interest.
Several rules govern the ethical obligations of firms and brokers:
- The Securities Exchange Act of 1934 broadly prohibits misstatements or misleading omissions of material facts, and fraudulent or manipulative acts and practices, in connection with the purchase or sale of securities.
- Section 15(c) of the Act prohibits a broker from effecting any transaction in or inducing or attempting to induce the purchase or sale of any security by means of any manipulative, deceptive, or other fraudulent device or contrivance.
- FINRA Rule 2010 (Standards of Commercial Honor and Principles of Trade) states that a firm “in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.”
- FINRA Rule 2020 (Use of Manipulative, Deceptive or Other Fraudulent Devices) provides that no firm “shall effect any transaction in, or induce the purchase or sale of, any security by means of any manipulative, deceptive or other fraudulent device or contrivance.”
- FINRA Rule 2241 (Research Analysts and Research Reports), addresses conflicts of interest relating to the publication and distribution of equity research reports.
- FINRA Rule 2242 (Debt Research Analysts and Debt Research Reports), which becomes effective on February 22, 2016, addresses conflicts of interest relating to the publication and distribution of debt research reports.
In addition to these broad obligations, FINRA and the SEC have implemented measures that mandate disclosures and outright prohibitions on certain activities.
In addition to examining for firms’ compliance with these and other rules that govern ethical obligations of industry participants, FINRA assesses how firms identify, mitigate and manage conflicts of interest, including conflicts related to compensation practices.