SEC chief sees risk to investors in broker bonus plans

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The federal focus on excessive financial industry pay now extends to the bonuses that brokerages often offer to lure top salespeople from rivals.

Securities and Exchange Commission Chairwoman Mary Schapiro today sent an open letter to brokerage chief executives warning that ‘certain forms of potential compensation may carry with them enhanced risks to customers.’

Specifically, Schapiro’s letter focuses on the risk that brokers lured with rich bonuses or other incentives might victimize customers to generate commissions big enough ‘to justify special arrangements that they have been given.’

If a broker ‘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.

It isn’t clear what spurred the letter, but Bank of America’s Merrill Lynch unit has become particularly aggressive in its recruiting recently.

Schapiro doesn’t call for broker bonuses to be reined in but rather advises brokerage CEOs and 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.’

Isn’t that what they’re supposed to be doing anyway?

-- Tom Petruno