FINRA recently sent out targeted exam letters focused compensation practices. The intent of this targeted exam is to assess how firms identify, mitigate and manage conflicts of interest when it comes to compensation paid to registered representatives.
This limited examination is designed for information gathering purposes and to determine best practices around the sale of certain products to further focus on whether there are certain incentives for the sale of certain products. In order words, does the compensation arrangement around a particular product create a conflict of interest where the representative has a financial incentive that may outweigh his/her the best interests of the client.
So what does this limited exam mean? It is unlikely that any enforcement actions will come out of this limited exam. Nevertheless, the results of the exam will surely set the table for FINRA taking a harder and broader look at firm compensation practices for conflicts of interest.
Considering that FINRA has highlighted product specific compensation practices as an area of interest, now is as good a time as any for you to review how you compensate your registered representatives. Although defining a “conflict of interest” is a murky task, this is a worthy exercise, particularly if there is a substantial variation in compensation for the sale of certain products. Take preventative steps now to avoid an enforcement proceeding later.