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Schapiro Cautions Broker-Dealers on Compensation

Yesterday, the SEC issued a letter sent by Chairman Mary Schapiro to the chief executives of major broker-dealer firms cautioning them that, as they grow and recruit broker-dealer representatives, they should be mindful that enhanced compensation and bonus structures designed to attract new recruits could induce brokers to engage in conduct that is not in investors' best interest.

Certain forms of potential compensation may carry with them enhanced risks to customers. 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 tum create incentives to engage in conduct that may violate obligations to investors. For example, if a registered representative is aware that he or she will receive enhanced compensation for hitting increased commission targets, the registered representative could be motivated to chum customer accounts, recommend unsuitable investment products or otherwise engage in activity that generates commission revenue but i's not in investors' interest.


Schapiro encouraged broker-dealer firm CEOs to monitor that investor interests are considered when formulating incentive compensation schemes for their sales forces, and also that the firms ensure that supervision and compliance functions keep pace with the growth of the firm.

I therefore encourage broker-dealer firm CEOs and their fellow supervisors to be particularly vigilant in ensuring that sales practices are closely monitored and that investor interests are carefully considered in the sale of any security or other investment product.

I also encourage firms and their CEOs to ensure that, in the event a firm's sales force expands, the firm's supervisory and compliance infrastructure retains sufficient size and capacity.


The full text of Chairman Schapiro's letter to broker-dealer CEOs is available at:  http://www.sec.gov/news/press/2009/2009-189-letter.pdf