SEC Warns Broker-Dealers to be Mindful of Their Recruiting Bonuses

Securities and Exchange Commission Head Mary Shapiro is warning broker-dealers to be careful of the recruiting tactics they employ-especially those involving recruiting bonuses. She cautioned that attractive compensation packages can compel registered representatives to watch out for their own self-interests over the interests of investors, resulting in acts of securities fraud. For example, Shapiro cautioned that a broker who knows that she or he will be given a larger compensation for meeting certain commission goals might make unsuitable investment recommendations, churn customer accounts, or take part in other commission-revenue focused actions that aren’t necessarily in the clients’ benefit.

Shapiro is also asking broker-dealer heads to watch over big up-front bonuses. Brokerage firms continue to offer large recruiting bonuses to top registered representatives at rival investment banks. Recruiting packages at wirehouses Merrill Lynch, UBS, Morgan Stanley, and Wells Fargo Advisers are between 200-250% of trailing 12-month production. In many instances, an investment adviser who satisfies production targets and brings in a certain percentage of assets is frequently rewarded.

Shapiro’s letter to the firm’s CEOs reminded them that it is the broker-dealer’s responsibility to “police such conflicts” and supervise broker-dealer activities, especially those related to sales practices. She reminded the broker-dealers that when a sales group expands, it is the investment bank’s responsibility to not just supervise advisers but to make sure the compliance structure maintains the adequate capacity. She noted that investor interests must always be of prime importance when investment products, such as securities, are sold.

Unfortunately, there are brokers who choose to place their own financial gain over the interests of their clients. This can result in securities fraud losses for investors. A few examples of broker misconduct include churning, misrepresentation, negligence, breach of fiduciary duty, and unauthorized trading.

Related Web Resources:
Read Shapiro’s Letter (PDF)

Schapiro Message to B-D CEOs: Watch Your Recruiting Tactics, Research Mag, September 1, 2009
Chairman Mary Schapiro, SEC
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