FINRA recently issued a Targeted Exam Letter that is focused on conflicts of interest with respect to compensation practices for retail brokerage firms. As noted in FINRA’s Annual Priorities Letter, conflicts of interest continue to represent a recurring challenge that contribute to compliance and supervisory breakdowns which can lead to firms and registered representatives, at times, compromising the quality of service provided to clients. As a result, FINRA intends to continue its assessment of the efforts employed by firms to identify, mitigate and manage conflicts of interest, specifically with respect to compensation practices.
The review covers the time period August 2014 through July 2015 and the scope is limited to firm’s retail accounts. The information requested is extensive, and includes a description of the departments or committees that are responsible for reviewing and approving compensation policies for the firm’s registered persons, identification and descriptions of the controls utilized to identify compensation-related conflicts of interest, the surveillance efforts or supervisory processes that have been implemented to assess whether potential compensation-related conflicts of interest are materializing in a firm’s retail brokerage business and a description of both standard and non-standard compensation plans, and a discussion of how the compensation structures balance short-term incentives for registered representatives and clients’ long-term interests.
FINRA and other regulators conduct targeted exams, known as sweeps, to gather information and carry out investigations. Sweep information is used to focus examinations and pinpoint regulatory response to emerging issues. The number of firms included in targeted exams varies and the firms that are included are carefully chosen-in some cases only a few firms are included and in others, dozens. Firms are selected based on a variety of factors, including level and nature of business activity in a particular area, customer complaints and regulatory history, and prior examination findings.
In any event, it is clear that FINRA is focused on drilling down on compensation practices in the brokerage industry, which will result in both changes in compensation practices, and enforcement actions.