The Financial Industry Regulatory Authority has launched aconflict-of-interest sweep, and is telling broker-dealers tocompile a bunch of information and prepare for face-to-facemeetings with FINRA exam personnel.

FINRA says the sweep is just a way to “better understand” BDscurrent practices, but lawyers with BD clients suggest potentialenforcement actions may be brewing.

In a July targetedexamination letter, FINRA told BDs it is reviewing how firmsidentify and manage conflicts of interest, and as part of thereview FINRA examiners want to meet with executives and compliancestaffers to discuss the firm’s approach to “conflict identificationand mitigation.”

“At the meeting, we would like your firm to present on, amongother conflicts related topics, the most significant conflicts yourfirm is currently managing and the processes in place to identifyand assess whether business practices put your firm’s—or youremployee’s—interests ahead of those of your customers,” FINRA saidin the letter.

To prepare for the meeting, BDs must submit the followinginformation to FINRA by Sept. 14:

• Summary of the most significant conflicts the firm is currentlymanaging.
• Names of departments and persons responsible for conductingconflicts reviews.
• Summary of the types of reports or other documents prepared atthe conclusion of a conflicts review.
• Names of departments and persons who receive any final reportor other documentation summarizing a conflicts review.
• Available dates and times in the fourth quarter of 2012 thatexecutive management of your firm can meet with FINRA staff forapproximately three hours to discuss the firm’s approach toconflicts of interest.

While the inquiry “is not an indication that FINRA hasdetermined that your firm has violated any rules or regulations,”FINRA told BDs, it says the goal is to “better understand industrypractices and determine whether firms are taking reasonable stepsto properly identify and manage conflicts that could affect theirclients or the marketplace.” Knowing what firms do to addressconflicts and the challenges they face, FINRA said, “will helpFINRA develop potential guidance for the industry and determineother steps FINRA could consider taking in this area.”

But Doug Cohen, counsel in the Investment Management Group atLowenstein Sandler in New York, says that “conflicts of interestare a complicated, industrywide issue and most firms would welcomeadditional guidance from FINRA.” FINRA’s sweep, he says, “looks anawful lot like an examination and FINRA getting ready to play‘gotcha.’”

Brian Rubin, a partner with the law firm Sutherland, saysFINRA’s letter is “odd” in several respects. First, he says, “thepurpose is unclear. Is FINRA thinking about new rules or does ithave concerns about violations of existing rules? The letterdoesn’t clearly say.”

Instead, he continues, the letter talks about "developingpotential guidance and determining ‘other steps,’ which could meanenforcement actions.”

Also, Rubin says, “sweep letters normally don’t come from theheads of Market Regulation. Normally, they are sent out under thenames of staff people.” And, another oddity, he says, is that sweepletters “usually ask only for documents and information. Here,FINRA is also requesting a three-hour meeting with executivebusiness and compliance staff.”

Finally, “despite saying that there’s no indication ofviolations, the letter asks firms to identify their mostsignificant conflicts. The CCO of one BD said that question wassimilar to ‘When did you stop beating your spouse?’”