| April 24
April 24 Some of the loudest critics of a plan
to require stockbrokers to tell clients about bonuses they
receive for switching firms are not from Wall Street, but from
the insurance industry.
Insurers want the Financial Industry Regulatory Authority
(FINRA), the Wall Street industry-funded watchdog that is
pushing the plan, off their turf, they say.
The insurers' beef stems from a FINRA proposal that is set
for review by U.S. Securities and Exchange Commission. FINRA
wants investors to know of a potential conflict of interest at
play when brokers change firms and ask clients to move with
them: some brokers receive hefty bonuses that may sway them to
suggest the move to their clients, FINRA says. But those clients
may not be able to hold the same securities or could incur new
costs when they move their accounts to the broker's new firm,
FINRA has said.
The regulator's plan, filed with the SEC in March, would
apply to recruitment compensation of $100,000 or more, including
signing bonuses and other payments that brokers may receive
later. 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 higher increments.
Some of those bonuses may be based on compensation from
other financial services entities, such as insurers, that
partner with brokerages to sell products to investors, according
to FINRA's proposal. FINRA's proposal would require including
that compensation in bonus calculations.
Large brokerages have generally supported the plan, saying
it promotes transparency. Smaller firms, however, have said it
invades their brokers' privacy and that FINRA is wrong to assume
a conflict exists.
But a new argument cropped up during an SEC public comment
period that ended last week. Insurers are taking issue with
four lines of the FINRA plan that require the disclosures to
include funds received from insurance firms and others. They say
that is a huge overreach of authority.
Many of the 633,000 FINRA-licensed stockbrokers hold
additional licenses that let them sell other types of financial
products or services like insurance. Some even sell products
from insurers or other financial entities that are units of the
company that owns their brokerage firm.
FINRA's proposal places the watchdog squarely in
state-regulated insurance turf, insurers say. The plan "greatly
overreaches" and should be more tailored to focus on payments
tied to a broker's securities activities, wrote lawyers for the
Committee of Annuity Insurers, in a letter on April 18.
The coalition's 28 members include AIG Life & Retirement, a
unit of American International Group Inc, and Allstate
Financial, a unit of Allstate Corp. A letter from the
American Council on Life Insurers, a trade group, makes a
"We have authority to require brokers to disclose
compensation they pay to their associated persons employed in
the brokerage business," a FINRA spokeswoman said.
The largest bonuses can run into millions of dollars, with
brokers receiving two and three times the commissions and fees
they earned in previous years. Amounts tied to insurance vary,
depending on a broker's practice. Some brokers, for example,
work in teams that include an insurance specialist. Firms
structure bonuses as loans forgiven over seven to 10 years.
When setting the level of a signing bonus, firms typically
review a broker's sales across all the financial products that
the broker sells, said Jeff Bischoff, a brokerage recruiter in
Old Greenwich, Connecticut.
It is not realistic to carve out the amount of those bonuses
contributed by insurance firms or other kinds of companies,
because brokers sell a mixed bag of products, said Barbara
Roper, director of investor protection at the Consumer
Federation of America, an advocacy group. "You can't have clean,
jurisdictional boundaries for people who are conducting their
businesses across those boundaries," she said.
One of the committee's examples focused on fixed annuities,
a type of insurance contract in which the insurer pays a fixed
income stream in exchange for the investor's lump sum payment.
They are regulated by states. But FINRA has authority over sales
of variable annuities, the value of which is tied to performance
of an underlying investment portfolio. Brokers need both
insurance and FINRA licenses to sell variable annuities.
(Editing by Linda Stern and Matthew Lewis)