Conflicts of Interest and Complex Products Highlight Concerns about Wall Street


Broker-dealers’ conflicts of interest and the proliferation of complex financial products being sold by financial advisers are the top areas of concern to the Financial Industry Regulatory Authority (FINRA), according InvestmentNews (“Ketchum: Finra’s focus on conflicts of interest compounding,” by Bruce Kelly).

Speaking to attendees at FINRA’s annual meeting, its Chairman and CEO Richard Ketchum, reportedly remarked that broker dealers need to do a better job to “assess and disclose” their conflicts of interest, and to inquire whether sales practices “put your firm’s or employees’ interests ahead of investors’.”

Reality check: FINRA’s exhorting firms to become introspective about their inherent conflicts of interest, and disclose facts that will crimp sales to their customers has never worked in the past and will not work now. Self-interest will not be subordinated unless it is forced to do so.

Mr. Ketchum also talked to broker-dealers about the high-commission, complex financial products they are selling today, asking them to ask themselves whether these products are suitable for customers and observing that the “suitability rule remains in effect.”

As they are trying to sell these products, representatives should talk about their high costs and how the customer could lose money in them, Mr. Ketchum reportedly said.

Of course, most representatives who have been questioned in arbitrations brought by customers who have suffered significant losses in these products have been unable to explain how these products work. So Mr. Ketchum suggested that broker-dealers may need to focus more on training brokers about the product.

FINRA is the brokerage industry’s so-called “self-regulatory” organization. Many experienced observers argue it is more of a trade association than a true regulator because FINRA is funded by the very firms it purports to regulate and will not bite the hands that feed it. In its Notices to member firms, it has long been FINRA’s practice to suggest and invite, rather than require, firms to conduct their securities sales businesses in ways that put customers’ interests first. Suffice it to say that this will never happen until securities regulators who are given the resources to do their job enforce the standards to which the industry purports to adhere.

Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.