Conflicts of Interest

Brokerage firms and financial advisors have an affirmative duty to identify and disclose potential conflicts of interest to their customers. These conflicts may arise from a number of activities conducted by brokerage firms in the pursuit of revenues. From the publication of research analyses and reports to the manufacture of complex financial products later sold by their financial advisors, conflicts may not always be readily apparent.

Because of this inherent potential for conflicts of interest, brokerage firms and their financial advisors are subject to Financial Industry Regulatory Authority (FINRA) rules (including FINRA Rules 2010, 2020, 2241, and 2242) specifically designed to reduce the effects of these conflicts of interest.

FINRA rules require 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/or compensation structures and disclose all relevant facts to investors to enable them to better understand the costs and risks associated with an investment recommendation or investment strategy.

FINRA in its report on conflicts of interest identified an increasingly disturbing trend in the manufacture and sale of complex financial products to retail investors. In the report FINRA found that institutions that create these complex financial products may be using their financial advisors to create a market for these product by selling them to unsophisticated retail customers that may not understand the product’s features and the risks.

According to FINRA, financial institutions that both manufacture and distribute investment products are required to maintain safeguards to avoid potential conflicts of interests that may arise when financial advisors are pushed to recommend these proprietary products that are not in investors’ best interests. Additionally, financial institutions that enter into agreements with third-party providers of investment products should conduct independent due diligence reviews of the investment products prior to selling them to customers in order to protect investors’ interests.

Some potential conflicts of interest include:

• Financial advisors offering or recommending investment products or product providers due to the potential revenue to be generated;
• Financial advisor recommending an investment with higher commissions without regard to client suitability;
• Brokerage firms offering sales incentive programs to financial advisors for the generation of sales of a particular product;
• Financial institutions providing financial advisors with greater compensation for the sale of proprietary or affiliated products;
• Brokerage firms that performs multiple functions within the same transaction, i.e. advisor, underwriter, lender, counterparty, etc.;
• Brokerage firms may provide investment advice or discretionary portfolio management services to its clients, where they recommend or sell products that it or an affiliated company underwrite or issue.

FINRA rules are designed to reduce the effects from these and other conflicts of interest through the use of full disclosure to customers as an important tool to protect the investing public. Brokerage firms have a duty under the anti-fraud provisions of the federal securities laws to disclose material information and the specific nature of a brokerage firm’s disclosure requirements depends on the facts and circumstances of a given situation.

The Silver Law Group 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.