SEC Chairman Mary L. Schapiro today issued an open letter to remind broker-dealer chief executive officers of their supervisory responsibilities under the federal securities laws to oversee broker-dealer activities, particularly with respect to sales practices.
In the letter’s opening paragraph, Ms. Schapiro notes that she is issuing the letter in response to recent reports that special recruitment programs at some firms are premised on enhanced compensation arrangements:
Recent press articles have reported that some broker-dealer firms may be engaging in a vigorous recruiting program for broker-dealer registered representatives. Reports suggest some firms are offering substantial inducements to potential registered representatives, including large up-front bonuses and enhanced commissions for sales of investment products. In light of these reports, I want to remind broker-dealer firms and their CEOs of the significant supervisory responsibilities you have under the federal securities laws to oversee broker-dealer activities, particularly with respect to sales practices.
Ms. Schapiro goes on to point out the potential conflicts of interest raised by certain enhanced compensation arrangements, which could induce brokers to engage in conduct that is not in investors’ best interests:
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 turn 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 is not in investors’ interest.
Ms. Schapiro then reminds broker-dealer CEOs that they have an obligation to police for such conflicts:
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.
Finally, Ms. Schapiro’s letter reminds broker-dealer CEOs that, as their firms grow; their supervisory and compliance infrastructures should be increased and updated accordingly:
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.
