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Broker bonuses, differential comp....under fire?

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Mar 2, 2011 10:29 pm

The SEC proposed new incentive-based comp rules today, but the release was short on details.

The rules, which stem from Section 956 of the Dodd-Frank Act, would prohibit incentive-based compensation arrangements that encourage “inappropriate” risk-taking or could lead to “material financial loss” at broker-dealers and investment advisers with $1 billion or more of assets.

The prohibition applies to basically everyone who works at or is affiliated with such firms: executive officers, employees, directors, or principal shareholders. The SEC proposed defining “inappropriate” risk-taking as anything that fails to meet the standards “established in prior legislation,” though it was not immediately clear what legislation was being referred to here, as well as standards “set in guidance published by bank regulators last July.” Further details were not available.

The proposed rules would also require all firms with over $1 billion in assets to file annual reports on incentive-based compensation with the SEC and to develop policies and procedures to keep them in compliance with incentive-based comp requirements.

It is not clear what this all means for financial advisors and brokers, who get incentive pay in the form of recruiting bonuses that reward them for increasing assets and/or production, as well as what’s often called differential comp (higher pay for recommending certain products than for recommending others). It is possible that the SEC could decide that either or both of these encourage inappropriate risk-taking, though it is unlikely that financial advisor pay could result in material financial loss for a firm.

What do you think? Do such incentives ever encourage "inappropriate" risk-taking? Should they be curbed?

Check out the full blog post here:

Mar 3, 2011 6:49 pm

What do I think? I think you should clean up all the spam before asking us our opinions.