Better Late Than Never: FINRA Discovers Conflicts of Interest


    “The more things change, the more they stay the same.” (Plus ça change, plus c’est la même chose)

    –French Proverb

    Today’s announcement that the Financial Industry Regulatory Authority Inc. (FINRA), the brokerage industry’s regulator, will be looking at information from 14 large firms regarding potential conflicts of interest related to compensation and product sales, should look familiar.

    That’s because any financial services industry professional who has been awake for the past few decades should know that revenue sharing (dating back to the earliest days of mutual fund sales) and 12b-1 fees (introduced in 1980) have been specifically cited by academics and some industry professionals as causing conflicts-of-interest between financial firms, their reps and individual investors.

    So given this FINRA announcement it is surprising to see why this is classified as news.

    It’s even more depressing when Rick Ketchum, chairman and chief executive of FINRA,

    Richard Ketchum, FINRA
    Richard Ketchum, FINRA

    announced to the Consumer Federation of America (CFA) that FINRA will be “looking both to identify anything that we think is a serious exposure to investors and also to identify best practices, and give feedback to the firms and encourage adoption.”

    In his speech before the CFA, Ketchum said FINRA’s “goal is to address problems early and prevent harm to investors. And this is another area where we’re on the ground and in the field—monitoring emerging trends from an investor-protection standpoint.”  This should have been considered a comic moment because conflicts of interest have existed for decades, so how is FINRA working to “address problems early”?

    Another maddening sentence from Ketchum was: “At FINRA, we spend a lot of time thinking about what drives investment professionals to recommend products that are less than appropriate for their customers—or to make other mistakes that harm investors.”  So to hasten their thinking process, FINRA should look at the money paid to advisers to push one product over another. No need to spend too much time thinking that one through; just follow the revenue sharing and the special sales incentives paid to advisers to promote that special fund.

    Insulting to Investors

    But there is more.

    Ketchum’s lame announcement is also insulting to individual investors. Average investors have been victimized by conflicts of interest for decades without any serious attempt by the SEC, Ketchum’s former employer, and FINRA, or its regulatory predecessor, the NASD, to educate investors about the blatant push of proprietary product through brokerage channels, and the huge compensation streams created by revenue sharing and 12b-1 fees that subordinated the best interests of unsuspecting investors to the pecuniary gains of their “objective” financial advisors.

    Even worse, all of these issues are well known to the industry.  All they have to do is have their lobbyists push the can down the road, and FINRA and the SEC will be a few miles (and years) behind them.

    Sadly, Ketchum must hold the CFA is such low regard that he would insult its membership by making this announcement at their main conference. If the CFA’s financial services advocacy department respected its own membership, it would decline to appear at any future FINRA or SEC hearings or requests for public comment since those agencies clearly are not making any serious progress in their attempts to protect individual investors and advance the adoption of tough fiduciary standards for all investment advisers.

    As it is today, the CFA is just an underfunded, small actor in the SEC and FINRA political theater. If the CFA declined to appear at those public hearings it would dramatize the message that the interests of individual investors are not taken seriously, so why proceed through the ritual?

    That would give the entire stage to the real stars of the show: the financial service industry lobbyists.

    For instance, the Investment Company Institute, the lobbying group for the mutual fund industry, spent about $50 million in 2011 alone influencing legislators and regulators.  It employed five full-time, 30 part-time and 75 outside lobbyists to promote the fund industry. It is important to note that this money was not spent to promote the interests of individual investors, but the interests of fund companies. The concerns of those two groups are certainly not identical. In many instances, they are just the opposite.

    And that may be the best starting point to identify why conflicts of interest are an inherent part of the financial services industry.

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    Chuck Epstein has managed marketing communications and public relations departments for major global financial institutions and participated in the launch of industry-changing financial products. He also has written by-lined articles for over 50 publications, five books and served as editor and publisher of nation’s first newsletter on the topic of using the PC for personal investing and trading. (“Investing Online, 1994-1999). He also is a marketing consultant, writer and speaker on topics related to investor protection and opportunities in the very dynamic cannabis industry. He has held senior-level marketing, PR and communications positions at the New York Futures Exchange, Chicago Mercantile Exchange, Lind-Waldock, Zacks Investment Research, Russell Investments and Principal Financial. He has won national awards from the Mutual Fund Education Alliance (MFEA) and his web site,, was named best small blog in 2009 by the Society of American Business Editors and Writers (SABEW).


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