Registered investment advisers have always been required by the SEC to provide their clients with written disclosure about conflicts of interest. Investment advisers are a fiduciary with respect to providing investment advisory services to their clients. Disclosure about conflicts of interest is implicitly required as a fiduciary. Now, the Financial Industry Regulatory Authority (FINRA) has proposed that broker-dealer member firms of FINRA disclose, in writing to their non-institutional customers, conflicts of interest prior to providing services to such customers.
This FINRA initiative comes on the heels of the passage of the Dodd-Frank Wall Street Reform and Consumer Protect Act, which requires the SEC to, among other things, conduct a study on what obligations broker-dealers have to their customers and make rules establishing fiduciary duties for broker-dealers. This proposal appears to be FINRA's attempt to stay out in front of likely SEC action in this area.
FINRA's proposal would require broker-dealers to provide a disclosure statement to their retail (i.e., non-institutional) customers listing the types of accounts and services available, the fees associated with each account and service, whether fees are negotiable, incentives the broker-dealers or its representatives have for recommending certain products, investment strategies or services, conflicts that the broker-dealer has with its customers, and how the broker-dealer proposes to handle those conflicts. In addition, the written disclosure would have to detail any limitations on the duties the broker-dealer owes its customers.
FINRA is asking for comments on its proposal to determine if it is too broad or too narrow and how the broker-dealers may be able to correspond its disclosure statement to customers (including by electronic means) without unduly confusing customers with unnecessary and/or overwhelming information.
Comments on the proposal must be submitted by December 27, 2010. After that, the proposed rule would have to be approved by the SEC. The proposal can be reviewed in its entirety online at http://tinyurl.com/2bdcb7d.