In recent years, FINRA has frequently expressed concerns about conflicts of interest in the financial services industry. FINRA is now conducting a sweep of firms to review how firms identify and manage their conflicts of interest. FINRA sent its “Targeted Examination Letter” to a number of firms in July 2012, seeking information by September 14, 2012. The letter also requests a three-hour follow-up meeting during the fourth quarter of 2012 with the firms’ executive business and compliance staff. FINRA’s focus, according to the letter,1 is the firms’ approaches to conflict identification and mitigation. FINRA wants to know the most significant conflicts each firm is currently managing, and the processes the firms have in place to identify and assess whether their business practices put the firm's or its employees’ interests ahead of those of its customers.
FINRA allays possible concerns about enforcement actions emerging from this letter (which apparently was not issued by the Department of Enforcement) by indicating that the goal of the sweep is to better understand industry practices and determine whether firms are taking reasonable steps to properly identify and manage conflicts that could affect their clients or the marketplace. FINRA indicates that it will seek to develop potential guidance for the industry. The unusual nature of the request, including the required three-hour meeting, makes it highly unlikely that FINRA would use the firms’ responses as a basis for enforcement action. However, as with any FINRA request, each broker-dealer that receives the letter should take it seriously and make sure that the information it provides is complete and accurate, and provides a positive reflection of the firm’s supervisory systems and procedures. And firms should still keep in mind that any time FINRA seeks information from a member firm, the regulator is free to commence informal or formal disciplinary action based upon that information.
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