COMPLY-FINRA head sees bonus disclosure as common sense measure

Tue Jan 8, 2013 3:07pm EST

Jan 8 (Reuters) - Securities brokers will have a hard time convincing the head of Wall Street's watchdog that their clients don't need to know about generous signing bonuses they accept to switch firms.

The Financial Industry Regulatory Authority is considering a proposal requiring the disclosure of signing bonuses, a move that is opposed by some in the industry.

Such a rule would shed more light on the brokerage recruiting world, where signing bonuses for top brokers have become outsized, and conflicts of interest can arise due to compensation packages.

"There is a very real impact for investors of moving from firm to firm," Richard Ketchum, FINRA's chairman and chief executive, told Reuters in an interview on Tuesday. Among them: securities branded with one brokerage's name often cannot be moved to another.

As a result, investors may be forced to pay commissions to sell branded mutual funds and other securities to update their portfolios.

That makes it difficult to think of a reason why investors would not want to know that their brokers were paid a lot of money to switch firms, Ketchum said.

Last week, FINRA asked the public to submit comments about the idea, which would require brokers to provide details about "enhanced compensation" valued at $50,000 or more after joining a new firm.

Ketchum wants FINRA to iron out a final proposal during the next six to eight months.

FINRA, which is funded by brokerages, is considering the proposal as its examiners take a broader look at conflicts of interest at brokerages and controls to keep them in check. Those include compensation that may motivate brokers to push certain securities to investors.

What's more, incentive compensation could potentially drive some brokers to sell new products unnecessarily so they can justify their move to the firm and clients who came along, Ketchum said.

That doesn't mean bonuses are wrong or that FINRA wants to hamper brokers from getting a better deal for their skills, Ketchum added. "We live in a capitalist society and people are free agents. They deserve to move to better situations," Ketchum said.

FINRA, which has been pressing brokerages for details about managing conflicts tied to broker compensation and other issues, has been discussing the disclosure plan with firms since late 2012. [ID nL1E8MTALK]. It will continue this push through 2013, Ketchum said.

The regulatory notice published last week asking for comments on the proposal provides the most explanation to date.

FINRA's proposal requires brokers to provide details about signing bonuses, along with annual bonuses and those based on production while at a firm. The disclosure plan would also cover "transition assistance" such as moving expenses and office furniture provided by the new firm.

Under the proposal, brokers would have to disclose the details for one year after a move.

Signing bonuses for top brokers have become outsized over the past year, recruiters and industry lawyers say. At top firms, brokers are receiving 160 percent to around 195 percent of their annual trailing revenue production to switch employers. Compensation is typically structured as forgivable loans, with a percentage of the loan forgiven annually, often during a seven to ten-year term.

FINRA is seeking Wall Street's input on the plan, including details about the method of disclosure and whether FINRA should substitute a different amount for the $50,000 exception.

FINRA also wants to know if the disclosure rule should apply to all customers recruited by brokers during the first year at their new firms, instead of focusing solely on previous clients.

Comments are due by March 5.

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