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Conflicts of Interest

Brokerage firms and financial advisors have an affirmative duty to identify and disclose potential conflicts of interest to their retail and institutional customers, these conflicts many time arise from the pursuit of revenues by the brokerage firm and its financial advisors from various sources. Financial Industry Regulatory Authority (FINRA) rules are designed to reduce the effects of conflicts of interest which rely on the full disclosure of conflicts of interest to customers as a mechanism for investor protection. Brokerage firms have an obligation to identify any conflicts of interest specific to a brokerage firm’s business model and disclose all relevant facts to investors to enable them to better understand the costs and risks associated with an investment or investment strategy.

FINRA recently focused its concerns about conflicts of interest in an executive summary, Report on Conflicts of Interest, which identified the increasingly disturbing trend in the manufacture and sale of complex financial products to retail investors. According to FINRA, investors “may struggle to understand the features, risks and conflicts associated with these products.” According to FINRA, brokerage firms that both manufacture and distribute financial products are required to maintain effective safeguards to avoid pressures on financial advisors to recommend proprietary products to the detriment of investors’ interests. Additionally, brokerage firms with revenue sharing or other partnering arrangements with third parties should exercise the necessary due diligence and independent review of financial products to protect investors’ interests.

A brokerage firm’s pursuit of profits and how financial advisors are compensated both create inherent conflicts of interest with the customers they serve. FINRA rules and regulations require that brokerage firms identify and disclose any conflicts of interest to enable investors to better understand the costs and risks associated with an investment recommendation. These conflicts of interest include:

  • Brokerage firms offering financial products or product providers due to revenue or profit;
  • Financial advisors offering or recommending financial products or services based on revenues;
  • Financial advisor recommendations without regard to client suitability;
  • Brokerage firms offering sales incentive programs to financial advisors;
  • Brokerage firms providing financial advisors preferential compensation for proprietary products;
  • Financial advisors who recommend financial products with greater compensation than alternative investments that are more suitable for clients;
  • Brokerage firms that performs multiple roles with respect to a client or transaction, in the capacity as advisor, underwriter, lender, principal counterparty or derivative counterparty;
  • Brokerage firm engages in trading activities for its own account or client accounts, while other clients are active in related markets at the same time;
  • Brokerage firm may provide investment advice or discretionary portfolio management services to its clients, and recommend or sell products that it or affiliated companies underwrite or issue.

FINRA rules are designed to reduce the effects from conflicts of interest through reliance on the full disclosure to customers as an important tool. Securities regulators rely upon full disclosure to protect the investing public. A brokerage firm’s duty under the anti-fraud provisions of the federal securities laws to disclose material information depends upon the nature of its relationship with a customer. The specific nature of a brokerage firm’s disclosure requirements depends on the facts and circumstances of a given situation, and these obligations are established in statutes, regulations and case law.

Our team of lawyers can help you determine whether an investment loss is the result of a conflict of interest in a brokerage account. If an investor suffers losses as a result of a conflict of interest or other misconduct they may be able recover their losses in a FINRA arbitration claim.


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