As a professional, I understand the importance of creating content that is both informative and optimized for search engines. In this article, we will be discussing the topic of continuing commission agreements within the context of the Financial Industry Regulatory Authority (FINRA).
Continuing commission agreements are a type of compensation structure commonly used in the financial industry. However, these agreements have come under scrutiny in recent years due to concerns about conflicts of interest and potential violations of FINRA regulations. In this article, we will explore the basics of continuing commission agreements, their potential risks, and how FINRA is addressing these issues.
What are continuing commission agreements?
Continuing commission agreements (CCAs) are agreements between financial advisors and their clients that establish a commission-based compensation structure. This means that the advisor receives a commission for any securities transactions carried out on behalf of the client.
CCAs can be a lucrative source of income for financial advisors, as they receive ongoing commissions for as long as the client holds the securities in question. However, these agreements have been criticized for creating conflicts of interest, as advisors may be incentivized to recommend investments that are not in the best interest of the client.
Risks associated with CCAs
One of the main risks associated with CCAs is the potential for conflicts of interest. Because advisors receive ongoing commissions for as long as the client holds the securities, they may be motivated to recommend investments that generate higher commissions, even if those investments are not the best choice for the client.
In addition, CCAs can make it difficult for clients to switch advisors or investment products, as the advisor may be reluctant to give up a source of ongoing revenue. This can limit the client`s options and potentially harm their investment performance.
FINRA`s stance on CCAs
FINRA has expressed concerns about the potential risks associated with CCAs and has taken steps to address these issues. In 2016, the organization issued Regulatory Notice 16-19, which stated that CCAs “can create a conflict of interest that may be inconsistent with a broker-dealer`s obligations under FINRA rules.”
The notice went on to state that broker-dealers must disclose the potential conflicts of interest associated with CCAs and ensure that they are recommending investments that are in the best interest of the client.
In addition to regulatory notices, FINRA has also taken enforcement actions against broker-dealers who have violated these rules. In 2018, for example, the organization fined a broker-dealer $1.2 million for failing to disclose the potential conflicts of interest associated with CCAs.
Conclusion
Continuing commission agreements can be a lucrative source of income for financial advisors, but they also pose potential risks to clients and may be inconsistent with their best interests. As a result, FINRA has taken steps to address these issues and ensure that broker-dealers are acting in accordance with their obligations under FINRA rules.
If you are a financial advisor or client with questions about continuing commission agreements or other regulatory issues, it is important to seek out the advice of a qualified professional who can help you navigate these complex issues. By doing so, you can help ensure that your investments are being managed in your best interest.