Anti-Reciprocal Rule (FINRA) - Explained
What is the AntiReciprocal Rule?
Written by Jason Gordon
Updated at April 17th, 2022
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Table of Contents
What is the Anti-Reciprocal Rule?How Does the Anti-Reciprocal Rule Work?Examples of Anti-Reciprocal Rule EnforcementAcademic Research on Anti-Reciprocal RuleWhat is the Anti-Reciprocal Rule?
The Anti-Reciprocal Rule is a regulation by the Financial Industry Regulatory Authority (FINRA) that prohibits a mutual fund manager and a brokerage firm from colluding to engage in business transactions that will affect a client negatively. The anti-reciprocal rule was designed to protect investors and clients of brokerage firms from being victims of conflict of interest that might occur when a mutual fund and brokerage frim collaborate. When collaborations occur between two market makers such as a brokerage firm and a mutual fund, an investor might be a victim of bad advice emanating from conflict of interest. The anti-reciprocal rule protects investors from such.
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How Does the Anti-Reciprocal Rule Work?
The anti-reciprocal rule was first used by FINRA in 1973 after its adoption, this rule prevents the occurrence of a collaboration between two market makers that are only for their own benefits and not for the best interest of their clients. When brokerage firms and mutual firms go against the anti-reciprocal rule, they face a penalty or pay a fine to FINRA. There are diverse arrangements or collaborations between a brokerage firm and a mutual fund that could cause harm to an investor. For instance, if a brokerage firm recommends a mutual fund company to an investor only for them to generate commissions on the investors they send in, such collaboration is against the interest of the client or investor. When the anti-reciprocal rule was amended in 1981, it included some definitions that offer more protection to clients of brokerage firms and investors.
Examples of Anti-Reciprocal Rule Enforcement
There are many scenarios when FINRA has enforced the anti-reciprocal rule and punish brokerage firms and mutual fund companies that violate the rule. Usually, when this rule is violated, the offender is required to pay a fine to FINRA. The National Adjudicatory Council (NAC) is the appeal body of FINRA, this is the council that conducts hearings for cases related to the violation of the anti-reciprocal rule brought before it.