FINRA Series 6 Investment Company and Variable Contracts Products Representative ExaminationProfessional Conduct and Ethical ConsiderationsEasy
A registered representative is offered a referral fee by an unaffiliated insurance agent for each client the representative directs to the agent for life insurance policies. The representative does not disclose this arrangement to their firm or to the clients. This practice is prohibited primarily due to concerns about:
- AUndisclosed conflicts of interest and potential for unsuitable recommendations.
- BThe referral fee exceeding FINRA's gift limits.
- CThe insurance agent not being a FINRA member.
- DLack of firm supervision over the insurance products.
Show answer & explanationAnswer & explanation
Correct answer: A. Undisclosed conflicts of interest and potential for unsuitable recommendations.
Receiving undisclosed compensation for referrals creates a clear conflict of interest, as the representative may be incentivized to recommend the insurance agent regardless of whether it's truly in the client's best interest. This can lead to unsuitable recommendations.
Why the other options are wrong
- B. Referral fees are generally different from gifts; the primary concern is the conflict of interest, not a specific gift limit.
- C. The agent's non-FINRA status is relevant but secondary to the undisclosed compensation conflict.
- D. While firm supervision is a concern, the primary issue is the undisclosed payment influencing recommendations.
Undisclosed Referral Fees
Compensation received by a registered representative for referring clients to an outside party, without full disclosure to the firm and clients, creating a conflict of interest.
- Creates a conflict of interest.
- Can incentivize unsuitable client recommendations.
- Requires disclosure to the firm and often to clients.
- May fall under 'selling away' if the referral is for a securities transaction.
Memory trick: Undisclosed fees mean hidden greed, client's needs won't take the lead.