U.S. SEC to review plan to require brokers to disclose bonuses

March 11 Tue Mar 11, 2014 11:38am EDT

March 11 (Reuters) - Wall Street's industry-funded watchdog has asked the U.S. Securities and Exchange Commission to approve a measure that would require stockbrokers to tell clients about bonuses they receive when they switch firms, according to a regulatory filing.

The Financial Industry Regulatory Authority late Monday, sent the plan to the SEC, whose approval it needs. The 351-page proposal will be subject to a public comment period before the SEC considers and votes on it.

Brokers often receive hefty signing bonuses when moving from one securities firm to another. Disclosing these payouts would inform investors asked to follow their broker of a potential conflict of interest, FINRA Chief Executive Officer Richard Ketchum has said.

FINRA also said clients would benefit from knowing that moving their assets to the recruiting firm would affect the types of securities they can hold or impose new costs, the regulator wrote in its proposal.

The proposal would apply to recruitment compensation - including signing bonuses - of $100,000 or more and to future payments contingent on performance criteria. Brokers and their firms would not have to disclose exact dollar amounts, but rather the ranges in which the compensation falls.

The first range would be $100,000 to $500,000, followed by $500,000 to $1 million, with others increasing incrementally to $5 million and up.

Brokers and their firms would have to make the disclosure at the time of their "first individualized contact" with the former customer.

Brokers who contact former clients in writing would have to provide them with a written disclosure at the same time. Brokers who instead speak to former customers about switching firms would have to make the disclosures orally at that time and send a written disclosure within 10 business days, according to FINRA.

FINRA's board signed off on the measure in July, clearing the way for the regulator to formalize the plan and send it to the SEC.

FINRA began discussion the proposal in late 2012. The idea set off controversy in the industry about, among other things, whether customers would fully understand the information and if the disclosures would discourage clients from following their brokers to a new firm.

The largest brokerage firms ultimately voiced their support for the proposal in public letters to FINRA. Many smaller firms, however, view the plan as a deterrent to business.

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