Alert November 02, 2010

FINRA Seeks Comment on Proposal to Require Member Firms to Provide Disclosure to Retail Customers of Services, Conflicts and Duties

On October 27, 2010, FINRA published Regulatory Notice 10-54 (the ‘Notice”) requesting comment on a proposal to require member firms to provide disclosure documents to retail customers.  In the Notice, FINRA describes the proposal as arising out of the same concerns that led Congress to require, in the Dodd-Frank Wall Street Reform and Consumer Protection Act, that the SEC study whether a fiduciary standard should be applied to broker-dealers and issue rules accordingly.

According to FINRA, the disclosure document, which would be similar in purpose to Part 2 of Form ADV, the client disclosure document for registered investment advisers, would provide useful information about the types of accounts and services offered by the member firm, its associated conflicts of interest and any limitations on duties owed to customers, regardless of the ultimate contours of any heightened standard of care for broker-dealers. 

The Notice does not include the text of a proposed rule, but instead lists subject matter to be considered for inclusion in the proposed disclosure document, including:

  • the scope of products and services provided to retail customers by the firm;
  • any limitations on products offered, including the fact, if true, that the firm only offers the products of certain sponsors or issuers;
  • all fees associated with each brokerage account and the services provided for each fee;
  • financial or other incentives that a firm or its sales people have to recommend certain products, investment strategies or services over similar ones;
  • conflicts that may arise between the firm and its customers and those that may arise in meeting the competing needs of multiple customers, and how the firm manages the conflicts; and
  • limitations on the duties the firm owes its customers.

FINRA requests comment on the scope of disclosure, its form and content, and the method and timing of delivery.  Comments are due by December 27, 2010.