Memo: SEC to issue new broker pay rules by April

Nov 10, 2010 @ 2:22 pm

By Bruce Kelly

The Securities and Exchange Commission is expected to issue new rules regarding broker pay by April, according to a memo obtained by InvestmentNews.

In a June memo to clients, law firm Ropes & Gray LLP said bank holding companies, broker-dealers and investment advisers must disclose to appropriate federal regulators by April 21 “the structure of all incentive-based compensation arrangements that they offer.”

The SEC's goal is to determine whether the compensation structure provides an executive officer or employee with “excessive compensation or benefits or could lead to a material financial loss to the institution,” the memo said.

Also by that date, federal regulators are to “prescribe regulations that prohibit any type of incentive-based payment arrangements or any feature of such arrangements that the regulators determine encourage inappropriate risks by the institutions by providing” an executive or employee “with excessive compensation or benefits, or that could lead to a material financial loss to the institution,” according to the memo. “No reporting of actual compensation will be required.”

An SEC spokesman declined to comment.

SEC Chairman Mary Schapiro discussed broker pay Monday in New York during her speech at the Securities Industry Financial Markets Association's annual meeting. She said that the SEC is writing rules about broker compensation, focusing particularly on pay that rewards risk taking.

The SEC's action was prompted by financial reform legislation that Congress passed over the summer.

One focus of Ms. Schapiro's remarks was large bonuses reps receive when leaving one firm and joining another. Upfront bonuses and compensation that encourages risk taking “are things that absolutely have to change,” she said. Ms. Schapiro said that the SEC intends to write rules that require “compensation programs that incentivize the right kinds of behavior.”

“Clearly, what's unnecessary are compensation programs that compensate and incentivize short-term risk at the expense of … the long-term franchise from the viewpoint of investors,” Ms. Schapiro said.

She also criticized pay schemes that produce “higher levels of compensation for higher levels of turnover in the portfolio,” citing churning practices, in which brokers can receive larger payouts for increasing the trading activity in clients' portfolios.

This is not the first time that Ms. Schapiro has addressed both of these compensation issues: In August 2009, she penned a letter to chief executive officers at broker-dealers encouraging them to be "particularly vigilant" in monitoring the sales practices and related compensation of brokers and advisers.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

Events

How 401(k) advisers can use 'centers of influence' to grow their business

Leveraging relationships with accounting, benefits, and property and casualty insurance firms can help deliver new business leads for retirement plan advisers.

Latest news & opinion

Things are looking up: IBDs soared in 2017

With revenue up, interest rates rising and regulation easing, IBDs are soaring.

SEC advice rule may give RIAs leg up over broker-dealers

Experts say advisers will be able to point to their role as fiduciaries as a differentiator in the advice market.

Brokers accept proposed SEC rule on who can call themselves an adviser

Some say the rule will clear up investor confusion, but others say the SEC didn't go far enough.

SEC advice rule: Here's what you need to know

We sifted through the nearly 1,000-page proposal and picked out some of the most important points.

Cadaret Grant acquired by private-equity-backed Atria

75-year-old owner Arthur Grant positions the IBD for the 'next 33 years.'

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print