Conflicts of Interest

Sometimes in connection with the recommendation of the purchase of a security, instead of advancing the customer’s or investor’s financial interest, the stockbroker or investment professional made the recommendation to advance their own financial interests.

The most abused investment products, or at least among the top ten investment products at issue in FINRA securities arbitrations, are the products that offer the highest compensation to the stockbroker or investment professional selling these securities, such as variable annuities, non-traded Real Estate Investment Trusts (“REITs”) or other alternative investments.

man with money in pocketIn addition, these same conflicts of interest, between the stockbroker’s financial interests and the financial interests of the investor may arise from the recommendation and sale of proprietary products including mutual funds that are related to the brokerage firm or securities broker-dealer. Firms are not allowed to explicitly offer greater compensation to their stockbrokers for the sale of these captive funds, but have devised clever methods of circumventing these restrictions by offering sometimes a higher gross commission payout based upon the overall composition of the stockbroker’s proprietary business but not tied to any specific security.

Much has been written about the “Best Interest Rule” or Regulation BI, where stockbrokers or investment professionals are required to make recommendations in the best interest of the customer.  While certainly this Rule (or in fact regulation) is a step in the right direction, the Rule only requires the “disclosure” of costs and fees, versus alternative costs and fees, and explicitly states that the new rule, and its violation, does not create a private cause of action for injured investors which would allow the investor to bring a lawsuit in court or a claim in arbitration before FINRA.

Regulation Best Interest or “Reg BI,” which became effective on June 30, 2020, established a standard of conduct for broker-dealers and associated persons when they recommend securities transactions to retail customers. Rule 15l-1(a)(1) of the Exchange Act, 17 CFR § 240.15l-1(a)(1).

Reg BI’s Best Interest Obligation requires a broker, dealer, or a natural person associated with a broker or dealer, when making a recommendation of any securities transaction to a retail customer, to act in the best interest of that retail customer at the time the recommendation is made, without placing the financial or other interest of the broker, dealer, or associated person ahead of the interest of the retail customer.

The Best Interest Obligation is satisfied only by compliance with four Component Obligations: (1) Disclosure Obligation, (2) Care Obligation, (3) Conflict of Interest Obligation, and (4) Compliance Obligation.

The Care Obligation requires a broker, dealer, or associated person to exercise reasonable diligence, care, and skill to understand the potential risks, rewards, and costs associated with a recommendation of a securities transaction to a retail customer.

The Care Obligation also requires a broker, dealer, or associated person to exercise reasonable diligence, care, and skill to have a reasonable basis to believe that their recommendation is in the best interest of the particular retail customer, based on that customer’s investment profile and the potential risks, rewards, and costs associated with the recommendation.

Reg BI also requires that a registered representative establish that it had a reasonable belief that the recommendation was in the best interest of the retail customer, and to consider reasonably available alternatives.

In addition, Reg BI’s Compliance Obligation requires a broker-dealer to establish, maintain, and enforce written policies and procedures reasonably designed to achieve compliance with Reg BI. According to the Adopting Release, a broker “should consider the nature of that firm’s operations and how to design such policies and procedures to prevent violations from occurring, detect violations that have occurred, and to correct promptly any violations that have occurred.”

Conflicts of interest, and tainted investment recommendations which are the product of those conflicts of interest, are a breach of fiduciary duty.  Among those duties, is the duty of care, the duty of candor, and the duty to refrain from self-dealing.   The recommendation that an investor purchase a security which yields the highest financial compensation for the stockbroker at the investors expense, rather than what is otherwise right or suitable for the investor is self-dealing.investment arbitration

Investors who suspect that they have been the victim of conflicted or tainted investment recommendations and have suffered losses, ought to consult with a lawyer to determine their legal rights.  

The Guiliano Law Group, P.C.

The Guiliano Law Group offers representation in these matters on a contingent fee basis, meaning that there is no cost to the investor unless we make a recovery.  Although we are selective about the cases in which we offer representation, we also offer a free, no-obligation, confidential evaluation of any conflict of interest claim.   For additional information, or to schedule an interview about your case, contact us at (877) SEC-ATTY