Schapiro Says Broker Compensation Can Promote Risk

The Securities and Exchange Commission (SEC) has encouraged broker/dealer (B/D) bosses to rein in their reps.

In a letter to CEOs of major B/Ds, SEC Chairman Mary Schapiro said compensation practices, such as large upfront bonuses and enhanced commissions, can encourage registered representatives to sell more securities and therefore carry risks to customers.

“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 churn customer accounts, recommend unsuitable investment products or otherwise engage in activity that generates commission revenue but is not in investors’ interest,” Schapiro wrote.

The chairman encourages broker/dealer supervisors to be “particularly vigilant” when it comes to monitoring sales practices and ensuring that investor interests are considered in the sale of securities. She also encourages firms and their CEOs to make sure that as their sales force expands, their compliance infrastructure does too.