BD and IA Conflicts of Interest: SEC Staff Says Don’t Set It (Them) and Forget It (Them)



SEC staff recently served up a juicy staff bulletin covering the standards of conduct for broker-dealer and investment adviser conflicts of interest. The staff bulletin includes 13 Q&As categorized into five different flavors relating to identifying, eliminating, mitigating, and disclosing conflicts of interest, as well as related to product menus. The staff bulletin “draw[s] from key fiduciary principles that include an obligation to act in a retail investor’s best interest and not to place [the firm’s] own interests ahead of the investor’s interest.”

SEC staff published the Q&As to “assist firms and their financial professionals with addressing conflicts of interest such that they comply with their obligations to provide advice and recommendations in the best interest of retail investors.” Importantly, SEC staff reminded firms that identifying and addressing conflicts should not be a “check-the-box” or a “set it and forget it” exercise. Instead, firms should establish “robust, ongoing process[es]” that are “tailored to each conflict.”

The staff bulletin is just the latest in the regulatory rotisserie from the SEC and FINRA related to standards of conduct for brokers and advisers. See our recent clients alerts covering the SEC staff bulletin about standards of conduct for account and rollover recommendations to retail investors and FINRA exam priorities related to Reg. BI, which also spotlights the regulatory focus on broker-dealer adherence to the Reg. BI conflicts of interest obligation.

Firms should expect SEC and FINRA exam teams to spend additional time peeling back the layers on conflicts during their next virtual visit. The staff bulletin serves as a useful recipe for understanding how they will go about that process and, therefore, serves as an easy-to-digest resource for firms when identifying and addressing conflicts of interest, including by considering: (i) the various examples of disclosure and product review processes cited by the staff; (ii) factors the staff highlighted related to whether conflicts require mitigation; (iii) mitigation methods identified by the staff; and (iv) for dual registrants, the staff’s points of similarity and distinction between the standards of conduct for brokers and advisers.

Finally, and as what should come as no surprise to well-seasoned compliance pros, the staff bulletin emphasizes the importance of “documenting the measures [firms take] to address and monitor conflicts of interest.” Explaining what you did, why, and how you did it is measurably easier contemporaneously with the action taken, long before the heat is turned up during an exam.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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