FINRA Poses New Questions On Compensation and Conflicts of Interest (with Lofchie Comment)

In order to further review "efforts employed by firms to identify, mitigate and manage conflicts of interest," FINRA requests responses to nineteen questions related to conflicts and compensation. The questions address only the treatment of "retail accounts," which are defined as accounts that are not institutional accounts under FINRA Rule 4512.

The questions are concerned with compensation issues primarily; e.g., how representatives are compensated for particular products and how that compensation is structured. The questions demonstrate FINRA's concern over how compensation structures motivate their employees to behave. In addition, the letter asks questions about proprietary versus third-party products, and about a firms' relationships with third parties that produce financial products; e.g., whether the firms allow third parties to take registered representatives on "off-site, overnight educational sessions."

Written responses to the questions are due by September 18, 2015.

Lofchie Comment: One reason that firms are going to struggle to answer these questions is because the questions themselves can be quite conceptual (which means there are no easy answers). Another reason is that the answers aren't necessarily ones that firms will be pleased to put in writing. There is no doubt that the questions will require firms to take a hard look at their compensation practices and, in some cases, to revisit or revise those practices. Firms should be very careful crafting their answers. Firms should be mindful that some questions may not have clear answers (for example, not every change in compensation has a "strategic goal" beyond employee retention). Thus, they should not struggle to provide detailed explanations where simple answers will do.

See: FINRA Targeted Examination Letter.