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Vedder Thinking | Articles FINRA Examination Review Provides Guidance to Identify, Mitigate and Manage Compensation Conflicts


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In recent years, the Financial Industry Regulatory Authority ("FINRA") has focused on conflicts of interest in the brokerage industry. FINRA, which regulates member exchange markets and brokerage firms, published a report on conflicts of interest in October 2013 that offered extensive guidance on how firms should handle conflicts.1

Although compensation-based conflicts represented only a portion of FINRA's October 2013 report,2 these conflicts have become a major focus of FINRA largely due to the role that compensation can play when brokers make recommendations to their clients. In August of this year, FINRA published an examination letter that it sent to approximately one dozen retail brokerage firms.3 The letter was designed to procure substantial information about a broad range of compensation practices. As FINRA stated in the letter, "the intent of this review it [sic] to continue our assessment of the efforts employed by firms to identify, mitigate and manage conflicts of interest, specifically with respect to compensation practices."4

FINRA agrees that the August 2015 letter operates as a means of evaluating areas of concern and measured improvement since the October 2013 report. "Hopefully in the two years since that report, we see firms having really strong policies in that given area. It's critical to investor protection to identify conflicts of interest and either mitigate them or eliminate them," says Michael Rufino, head of FINRA Member Regulation's sales practice program.5

Although the letter was sent to select brokerage firms, FINRA's decision to make it publicly available online presents a unique opportunity for brokerage firms to test the adequacy of their own processes by providing a helpful roadmap for identifying, mitigating and managing potential compensation conflicts.

FINRA's letter contains a list of 19 requests that ask not only about compensation structure, but also about specific efforts to identify, manage and eliminate compensation conflicts.6 For example, the letter asks firms to "[i]dentify and describe the composition of the departments or committees that are responsible for reviewing and approving compensation policies for the firm's registered representatives." In another item, the letter asks recipients to "[i]dentify and describe surveillance efforts or supervisory processes that have been implemented to assess whether potential compensation-related conflicts of interest are materializing in your firm's retail brokerage business."7

The letter also attempts to assess how brokerage firms have responded to FINRA's increasing focus, and extensive guidance, on compensation conflicts over the past few years. For example, the letter asks: "If changes to compensation structures were made during the period of August 2014 through July 2015, summarize each change and identify the strategic goal of each change."8 Fortunately, with the online publication of the August 2015 letter, FINRA has given brokerage firms a tool to "do something about it"—an excellent guidepost to assess their processes and take proactive steps.

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1 See generally Financial Industry Regulatory Authority, report on Conflicts of Interest (Oct. 2013) ("Finra October 2013 Report").
2 See id. at 26–36.
3 See Financial Industry Regulatory Authority, Conflicts of Interest Review - Compensation and Oversight (Aug. 2015), ("Conflicts of Interest Review").
4 Id. 
5 Ed Beeson, FINRA Exam Gives Handy Map To Spot Conflicts In Broker Pay, Law360 (Aug. 24, 2015, 6:38 PM),
6 See Conflicts of Interest Review, supra note 3.
7 Id.
8 Id.