SEC Says No New Rules On Broker Bonuses

Despite rampant speculation to the contrary, the SEC is not planning to write any new rules on broker recruiting bonuses, SEC spokesman John Nester told Registered Rep. magazine on Friday. At least one firm was already using the threat that recruiting bonuses would go away to pressure potential recruits to sign on with the firm by Dec. 31.

Despite rampant speculation to the contrary, the SEC is not planning to write any new rules on broker recruiting bonuses, SEC spokesman John Nester told Registered Rep. magazine on Friday. At least one firm was already using the threat that recruiting bonuses would go away to pressure potential recruits to sign on with the firm by Dec. 31.

The SEC is charged with regulating executive compensation under Dodd-Frank legislation, Nester said, but not broker bonuses. “I’ve checked with everyone here and there is no rulemaking that the SEC is undertaking at this time with respect to broker bonuses.”

Plenty of people in the industry have been thinking that new rules were in the cards, and due out by April. Indeed, in a recent offering letter, Wells Fargo Advisors' independent platform, FiNet, opened with the following paragraph, obtained by Registered Rep. magazine:

“Please see the attached updated offer letter with revised dates. Due to the SEC seriously considering doing away with upfront money, our new offer letters all have affiliation dates of end of March. For this offer to remain in effect with 2010 capital numbers, it must be signed by December 31. Signing the letter allows us to start you in the transition process and assign you a Practice Liaison and begin your training. It does not legally bind you to FiNet.”

In a statement, a FiNet spokeswoman said, “It’s a matter of practice at FiNet that all of our offer letters have expiration dates. This helps ensure that deals remain fresh and current with our underwriting criteria. The paragraph obtained by Registered Rep. was from an isolated e-mail from an individual to a recruit and not part of an official affiliation offer letter.”

Misfire

The idea that the regulator might be planning to write new rules concerning broker bonuses originated from an interview that Mary Schapiro did with Charlie Rose at the SIFMA regulatory conference in early November. At that time, she said the regulator is planning to write rules in the next few months that reign in compensation programs. Schapiro said she doesn’t like incentive pay that encourages individuals to take short-term risks at the expense of the long-term stability of the franchise and at the expense of investors—among other things, she mentioned the “big upfront bonuses” paid to “brokers who deal with retail customers.”

But Nester said Schapiro must have misspoken, or that her comments might have been misleading.

There is no question that Schapiro thinks the recruiting bonuses can create bad incentives. She said as much in a letter to brokerage executives in August 2009. Regulators worry that such bonuses may encourage brokers to try to reach certain production goals by churning client accounts—whether that’s the $1 million in 12-month production required to get certain deals, or the sales growth hurdles a broker needs to meet to get bonus money on the back end.

The recruiting bonuses that the four big Wall Street brokerages offer to brokers have been creeping up over the past 10 years and, for the best recruits, now reach over 300 percent of a broker's annual revenues. More than half of that money is typically awarded over 9 to 14 years, however, and is contingent on the broker meeting growth hurdles.

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