DUTIES AND CONFLICTS
Conflicts of Interest
FINRA Report on Conflicts of Interest
In 2013, FINRA published a Report on Conflicts of Interest on conflicts of interest in the broker-dealer industry to highlight effective conflicts management practices that may go beyond current regulatory requirements and identify potential problem areas. To help firms analyze the conflicts they face and implement a conflicts management framework appropriate to the size and scope of their business, the Report includes examples of how some large broker-dealer firms address conflicts. These practices—as well as those that are based on FINRA's experience and analysis—can help firms of all sizes improve their conflicts management practices. Of course, there is no one-size-fits-all framework. Firms need to assess the approach that is most effective for their particular circumstances.
• FINRA Report on Conflicts of Interest (October 2013): FINRA published a Report on Conflicts of Interest in the broker-dealer industry to highlight effective conflicts management practices
Finra Topic Page: Conflicts of Interest
(New) Disclosure of Hedging by Employees, Officers and Directors
The SEC adopted a rule to implement a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The new rule requires a company to describe any practices or policies it has adopted regarding the ability of its employees (including officers) or directors to purchase financial instruments, or otherwise engage in transactions, that hedge or offset, or are designed to hedge or offset, any decrease in the market value of equity securities granted as compensation, or held directly or indirectly by the employee or director. The new rule requires a company to describe the practices or policies and the categories of persons they affect. If a company does not have any such practices or policies, the company must disclose that fact or state that hedging transactions are generally permitted. The new disclosure is required in a proxy statement or information statement relating to an election of directors. The rule became effective on March 8, 2019.
• Securities and Exchange Commission Release No. 33-10593 (December 20, 2018), 84 FR 2402 (February 6, 2019): Disclosure of Hedging by Employees, Officers and Directors
Know-Your-Customer and Suitability Obligations
FINRA Rule 2090 (Know Your Customer) requires a firm to use “reasonable diligence, in regard to the opening and maintenance of every account, to know (and retain) the essential facts concerning every customer.” FINRA Rule 2111 (Suitability) requires a firm or associated person to “have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile.”
Additional information about the “know your customer” and suitability obligations—including Notices, Frequently Asked Questions, and a New Account Application Template—can be found on FINRA’s Suitability Web Page.
FINRA reminds firms of their supervisory obligations regarding the use of certifications and designations that imply expertise, certification, training or specialty in advising senior investors (senior designations). Regulatory Notice 11-52 outlines findings from a survey of firms and highlights sound practices used by firms with respect to senior designations. Firms are encouraged to adopt the practices that are outlined in this Notice to strengthen their own supervisory procedures, as appropriate to their business.
• FINRA Regulatory Notice 11-52 (November 2011): FINRA Reminds Firms of Their Obligations Regarding the Supervision of Registered Persons Using Senior Designations
• Professional Desigantions Database: Use this tool to decode the letters that sometimes follow a financial professional’s name and see whether the issuing organization requires continuing education, takes complaints or has a way to confirm who holds the credential.
FINRA ‘‘Pay-To-Play’’ and Related Rules
The SEC approved FINRA Rules 2030 (Engaging in Distribution and Solicitation Activities with Government Entities) and 4580 (Books and Records Requirements for Government Distribution and Solicitation Activities) to establish “pay-to-play” and related rules regulating the activities of member firms that engage in distribution or solicitation activities for compensation with government entities on behalf of investment advisers. The rules became effective on August 20, 2017.
• FINRA Regulatory Notice 16-40 (October 2016): SEC Approves FINRA “Pay-To-Play” and Related Rules
(New) Custodian of Books and Records
The Securities and Exchange Commission (SEC) approved a proposed rule change to amend FINRA Rule 4570 (Custodian of Books and Records) to: (1) provide a member firm that is filing a Form BDW (Uniform Request for BrokerDealer Withdrawal) the option of designating another FINRA member firm as the custodian of its books and records on the form; (2) clarify the obligations of the designated custodian; and (3) require the designated custodian to consent to act in such a capacity. These changes become effective on August 19, 2019.
• FINRA Regulatory Notice 19-16 (April 22, 2019): SEC Approves Amendments to FINRA Rule 4570
Third-Party Recordkeeping Services
This Notice provides firms with information regarding recent guidance issued by SEC staff regarding the use of recordkeeping services provided by third parties to preserve records pursuant to SEA Section 17(a) and SEA Rule 17a-4.
• FINRA Regulatory Notice 18-31 (September 14, 2018): SEC Staff Issues Guidance on Third-Party Recordkeeping Services
FINRA Supervision Topic Page
This site highlights FINRA rules 3110, 3120, and 3130 on supervisory procedures. It also contains links to related notices, guidance, news, and investor education.
FINRA is reminding member firms of their supervisory obligations regarding associated persons with a history of past misconduct that may pose a risk to investors. FINRA Rule 3110 (Supervision) requires member firms to establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and FINRA rules. An effective supervisory system plays an essential role in the prevention of sales abuses, and thus enhances investor protection and market integrity. As such, FINRA has long emphasized that member firms have a fundamental obligation to implement a supervisory system that is tailored specifically to the member firm’s business and addresses the activities of its associated persons. The notice highlights particular instances where heightened supervision of an associated person may be appropriate. FINRA is encouraging firms to adopt the practices that are outlined in the Notice to strengthen their own supervisory procedures, as appropriate to their business.
• FINRA Regulatory Notice 18-15 (April 30, 2018): Heightened Supervision, Guidance on Implementing Effective Heightened Supervisory Procedures for Associated Persons With a History of Past Misconduct