SEC Chairman Arthur Levitt Jr. has asked the NASD to look into disclosing--or even banning--recruiting incentives for brokers.
In an April 20 speech before a group of industry compliance people, Levitt said he has asked the NASD to examine whether "up-front bonuses, accelerated payouts, or certain other forms of broker compensation create inherent conflicts. If so, I suggested they consider requiring disclosure to clients--or, if there is no other choice, banning them altogether."
No firm discloses to clients that a broker has taken up-front money, Levitt said. When a broker moves, clients are usually told only that the new firm has better research and better service, he claimed. "We can't tolerate pitches that tell such a small part of a larger story," he told the gathering in Scottsdale, Ariz.
Levitt also attacked escalating payout grids and retroactive bonuses.
"We should be moving brokers away from such temptations."
But the SEC chairman's threat to ban recruiting payments may be all bluff.
"There's no way [the SEC] can impact" broker pay except under disclosure provisions of the '34 act, says Rick Stone, a securities attorney at Kaufman Malchman Kirby & Squire in New York City. The '34 act contains "detailed disclosure requirements. That's it. ... I don't think the NASD could go beyond that."
Stone notes that in dealing with an unrelated issue that Levitt has criticized--payment for order flow--the agency developed rules for disclosure rather than attempt an outright ban.
In an interview with RR, Levitt says he didn't suggest banning recruitment deals. "I have no problem with any of these [deals] as long as they're disclosed," Levitt says. As a client, "I'd really be provoked" to learn about an undisclosed bonus or special payout. "It's foolish not to disclose that to clients." Levitt adds that "the buying and selling of brokers [is] distasteful" and harms the image of brokers as professionals.
Ben Edwards, CEO of A.G. Edwards, says even disclosing the payments isn't a good idea. "It's a business decision we should make, not the government," Edwards says. "I can't imagine attorneys doing the same thing," that is, disclosing bonuses they receive when changing firms.
Edwards adds that the debate over recruiting incentives "presumes there's some kind of unpleasantness that's going on." He says the SEC "completely misunderstands" accelerated payouts. The SEC seems to believe that higher payouts can cause a broker to "ravish" clients. "The opposite is the case," Edwards claims. "It takes awhile [for a recruit] to bring the business back up" while the rep's former firm tries to "do everything it can to keep the clients." Edwards says he's never seen a broker misuse a higher payout to churn accounts.
In the past, A.G. Edwards gave a two-month salary as a recruiting inducement, Edwards recalls, but found too many recruits simply took "vacations" while they had the steady paycheck.
Levitt's dictate to the NASD isn't his first action on broker compensation. Last year before a Senate panel, he trumpeted the elimination of higher payouts for proprietary products--an action accomplished without rule making. But Levitt was careful to tell the panel that, "The commission does not intend to legislate compensation" on product-payout incentives.
In his April 20 speech, Levitt did say that firms should make proprietary products portable. Non-portability can make it expensive or difficult for a rep to move.
The SEC chairman also called on the industry to better educate investors and provide personalized performance information on statements.
"A world-class firm ... doesn't fear disclosing the total costs of managing an account," Levitt told the gathering.
Levitt also trumpeted the CRD system as a way for investors to check their broker.
