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Michelle Ong (202) 728-8464
Nancy Condon (202) 728-8379

Statement from Chairman and CEO Richard G. Ketchum on FINRA's Report on Conflicts of Interest

WASHINGTON — Today, FINRA published a

on conflicts of interest in the broker-dealer industry to highlight effective conflicts management practices that may go beyond current regulatory requirements and identify potential problem areas. In July 2012, FINRA initiated a dialogue with several large firms to review their conflicts management practices to better understand how the industry identifies and manages conflicts.

While many firms have made progress in improving the way they manage conflicts, our review reveals that firms should do more. To help firms analyze the conflicts they face and implement a conflicts management framework appropriate to the size and scope of their business, we are publishing examples of how some large broker-dealer firms address conflicts. These practices—as well as those that are based on FINRA's experience and analysis—can help firms of all sizes improve their conflicts management practices. Of course, there is no one-size-fits-all framework. Firms need to assess the approach that is most effective for their particular circumstances.

FINRA will continue to assess firms' conflicts management practices and the effectiveness of those practices in protecting customers' interests through its examination and oversight programs.

Highlights of Report on Conflicts of Interest

In July 2012—as an outgrowth of our mission to protect investors and consequent longstanding attention to conflicts issues—FINRA initiated a review at a number of large firms to better understand how they manage conflicts of interest and to identify effective practices to manage those conflicts.  

FINRA is publishing this

to share those practices and help firms of all sizes strengthen their own conflicts frameworks. Of course, there is no one-size-fits-all approach, but FINRA believes an effective conflicts management framework should address the following considerations, among others:

  • identifying and managing conflicts on an ongoing basis through an enterprise-level approach that is scaled to the size and complexity of a firm's business and that starts with a "tone from the top" that carries through to the organization's structures, policies, processes, training and culture;
  • establishing new product review processes that include perspectives independent from the business proposing products, that identify potential conflicts raised by new products, that restrict distribution of products that may pose conflicts that cannot be effectively mitigated and that periodically re-assesses products through post-launch reviews;
  • making independent decisions in the wealth management business about the products they offer without pressure to favor proprietary products or products for which the firm has revenue-sharing agreements;
  • minimizing conflicts in compensation structures between customer and broker or firm interests where possible and including heightened supervision when conflicts remain; for example, around thresholds in a firm's compensation structure;
  • mitigating conflicts of interest through disclosures and other information that enables customers to understand the factors that may affect a product's financial outcome—such as the use of scenarios and graphics for a particular product; and
  • including "best-interest-of-the-customer" standards in codes of conduct that apply to brokers' personalized recommendations to retail customers in order to maintain and increase investor trust.

While this report recognizes that many broker-dealer firms have made progress in improving the way they manage conflicts, it also emphasizes that there is still more firms need to do. FINRA will continue to review how firms manage conflicts and evaluate the effectiveness of firms' efforts. If we find that firms have not made adequate progress, we will evaluate rulemaking to require reasonable policies to identify, manage and mitigate conflicts.