The Financial Industry Regulatory Authority (FINRA) has announced it will be looking closely at potential conflicts of interest and financial incentives tied to the sales of complex financial products by major brokerages. The regulator also is looking at conflicts and incentives at broker-dealers that develop and sell certain complex products. FINRA has already commenced a sweep of firms to review how they identify and manage these conflicts of interest.
As noted in a recent Wall Street Journal column, these initiatives are “the first systematic look at conflicts” by the self-regulatory organization “in years.” The steps taken by FINRA are reminiscent of its investigation into conflicts of interest that began in earnest in 2003 tied to research analysts and investment banking practices.
Those investigations were preceded by large investor losses attributable to the bursting of the dot-com bubble. Similarly, and as discussed below, FINRA’s current investigation appears to be tied to ongoing investigations into “New and Structured Products,” most notably mortgage-backed securities and related derivative products associated with the financial crisis of 2007-2008.
As many will recall, although FINRA’s efforts in 2003 were focused on high-profile investigations into major financial institutions, they resulted in a number of related investigations into smaller firms that acted as partners, intermediaries, and trade counterparties.