When you deal with financial professionals, conflicts of interest come up from time to time. The anti-reciprocal rule exists to prevent one of these conflicts from hurting the client.
For instance, you go into a financial advisor to figure out where to re-invest the $10,000 in Bowie Bonds you found at the bottom of your dad's closet. The advisor immediately suggests a couple of "super-hot" mutual funds that "are absolutely fool-proof guaranteed money makers."
You don't know it, but the mutual fund company has given the advisor a kickback to make this recommendation. In fact, there are hundreds of other mutual funds with the same risk profiles and potential upside, all of them with lower costs than the one that was just recommended. But the advisor doesn't mention these other options because none of those mutual funds have sent a check.That situation is why the anti-reciprocal rule is in place.
The regulation, enacted by the Financial Industry Regulatory Authority, or FINRA, prevents managers of mutual funds and brokers from unduly pushing clients to use each other's products. The rule prevents (or at least theoretically prevents) backroom agreements that hurt investors.
Related or Semi-related Video
Finance: What is FINRA?5 Views
finance a la shmoop what is FINRA? Financial Industry Regulatory Authority
once again for those in the back that's Financial Industry Regulatory
Authority FINRA it's kind of a yoga mantra thing because firms get FINRA'd [Woman meditating with yoga]
every day well FINRA is the private agency that
regulates exchanges and brokerage firms that are members they administer tests
and actually create them you know like these the series exams which we just [Series exams appear]
happen to have shmoop if you've got 70 to 80 spare hours and want to give them
a looksie... think about all the bad PR that sleazy financial wheeler-dealers [Financial dealers discussing matters]
got back in the 1930s before the various acts were enacted you know the 33 34 40
nobody was gonna trust "Wall Street people" unless there was a kind
of Good Housekeeping Seal of fair-and-square dealers who made sure
that the various laws and compliance things were actually upheld..Note,
importantly that it isn't the job of FINRA or well any government body to
recommend buying selling or holding any particular security because you're gonna
make money it's only their job to be sure that the letter of the law is [Letter of law appears]
followed and that that letter is presented in a way so that everyone has
fair access to relevant and similar information it's all about making a fair
and square level playing field for all without that well Manhattan would look a
lot more like Mogadishu than Manhattan [Manhattan skyline appears]
Up Next
What are Prudent Investor Rule Standards, the Know Your Client Rule, and unsuitable recommendations?
What does it mean to have fiduciary obligation? To have a fiduciary obligation means that a third party has been given the trust and responsibility...
The act of hiding written complaints is...no bueno. An investment rep is legally obligated to pass on any such complaints to their employer.
What is a proxy? Proxy statements are documents that are sent to shareholders of public companies that contain detailed information on agenda subje...