SEC plans to issue new rules on broker pay

In remarks at the SIFMA annual meeting today, SEC Chairman Mary Schapiro said some brokerage pay practices ‘absolutely have to change'

Nov 8, 2010 @ 3:26 pm

By Bruce Kelly and Mark Schoeff Jr.

The Securities and Exchange Commission is taking aim at compensation practices across the brokerage industry — specifically the large upfront bonuses firms pay many brokers and advisers when they leave one firm and join another.

In remarks at the annual meeting of the Securities Industry Financial Market Association today in New York, SEC Chairman Mary Schapiro said the agency is in the process of writing rules about compensation, particularly pay that rewards risk-taking.

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,” referring to churning practices, in which brokers can receive larger payouts for increasing the trading activity in clients' portfolios.

John Heine, an SEC spokesman, declined to comment about SEC rulemaking and bonuses beyond Ms. Schapiro's remarks.

In the wake of the passage of the Dodd-Frank regulatory reform act this summer, the SEC is left with a broad mandate to rewrite financial service industry rules. But Ms. Schapiro has recently taken aim at upfront bonuses that large wirehouses and regional broker-dealers routinely pay to woo brokers from competing firms.

As firms scrambled to pick up brokers in 2009 after seismic shifts on Wall Street, some broker-dealers began offering top advisers pay packages that could be greater than 300%of one year's fees and commissions. Much of the bonus is linked to the broker's performance after joining the new firm.

That caught Ms. Schapiro's attention, and in August 2009 she issued an “open letter” to broker-dealer chief executives. (Read more here.)

“Certain forms of potential compensation may carry with them enhanced risks to customers,” she wrote. “Some types of enhanced compensation practices may lead registered representatives to believe that they must sell securities at a sufficiently high level to justify special arrangements that they have been given. Those pressures may in turn create incentives to engage in conduct that may violate obligations to investors.”

The retail brokerage industry has no single standard of disclosure regarding such bonuses, said Kent Christian, senior managing director and president of the financial services group with Wells Fargo Advisors LLC. Some firms have “fairly general” disclosure to clients about upfront bonuses, he said.

Most advisers, he added, would typically discuss any bonus along with the rationale for changing firms with clients, he added.

0
Comments

What do you think?

View comments

Recommended for you

B-D Data Center

Use InvestmentNews' B-D Data Center to find exclusive information and intelligence about the independent broker-dealer industry.

Rank Broker-dealers by

Featured video

INTV

How InvestmentNews picks its Women to Watch winners

The process is laborious and exacting, but well worth it. The end result each year is an impressive group of women in the advice industry from whom others can draw inspiration.

Latest news & opinion

Some good news about female recruitment in financial advice

Each of four core advisory positions tracked in InvestmentNews' benchmarking study has seen an uptick in women entrants.

10 ETFs that are up more than 35% this year

Amid the stock market carnage, there are still some funds posting big gains.

10 biggest HSA providers rated

Morningstar rated the largest plan providers as investment and spending vehicles.

Morningstar: DOL fiduciary rule reduces inflows to mutual funds with high loads

With the measure's demise, will the SEC's advice reform sustain the momentum?

6 tax strategies for year-end planning

How to help clients maximize their wealth using specific tax strategies before the end of the year.

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