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Schapiro Issues Warning To B-D CEOs

September 1, 2009 • Ray Fazzi

SEC Chairman Mary L. Schapiro has put out a word of warning to broker-dealers who are using large bonuses, enhanced commissions and other financial perks to land top producers.

In a letter issued on Monday, Schapiro tells broker-dealer executives that they need to make sure such financial inducements don't lead to bad sales practices. "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," Schapiro wrote. "Those pressures may in tum create incentives to engage in conduct that may violate obligations to investors."

As an example, she wrote, registered reps who receive enhanced compensation for hitting increased commission targets may be motivated to churn customer accounts and, in the process, recommend unsuitable investment products to their clients.

"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," she wrote.

Schapiro stated the letter of warning was in reaction to reports that some firms are offering "substantial inducements" to recruit registered representatives.

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14 years ago

SHAPIRO CHANGES COMPETIVIVE LANDSCAPE

The best thing that could happen is brokerage firms and custodians competing on the basis of the breadth and depth of counsel they support rather than the size of the recruiting bonus.This is the beginning of the industry being serious about serving the best interests of the consumer by safely bringing easily executable fiduciary counsel within the reach of every advisor as clients will allow.Presently, not one major brokerage firm (1) treats trade execution as a cost center as required for fiduciary standing, (2) allows their advisors to acknowledge their fiduciary responsibilities, (3) allows their advisors to create investment policy statemenmts consistent with fiduciary standing, (4)provides the resources necessary to conduct an asset/liability study on all the client's holdings as a whole before investment recommendations are made making it possible to add value, (5)provides access to sophisticated institutionally priced advanced investment strategies which lends credence to MPT, not presently possible in a retail environment, (6) embraces a functional division of labor that assures continuous comprehensive counsel necessary for fiduciary standing and superior investor results, (7) provides accountability for advisor recommendations, as the industry maintains that no advice is being provided, (8) is structured to support advisory services for each of the ten major market segments because technically, brokers do not provide advice, etc, etc. It is scandelous the terribily vulnerable position brokers, planners and RIAs find themselves in, needing to act in the consumer's best interest but being precluded from doing so with out their supporting brokerage and custody firms providing large scale institutionalized support for fiduciary standing. Shapiro is shifting the conversation to matters that support the trust and confidence of the investing public, which is long over due.