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.


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