* Proposal surfaces as FINRA considers compensation issues
* Misbehavior more likely before bonus, critics say
By Suzanne Barlyn
Nov 29 Wall Street's industry-funded watchdog is discussing a possible rule that would require securities brokerages to tell certain customers about compensation offered to brokers for moving to their firms.
The proposal is on the agenda for discussion at the Financial Industry Regulatory Authority's Board of Governors meeting, set for Dec. 6, according to FINRA's website.
FINRA is considering the proposal as it also takes a broader look at conflicts of interest at brokerages. The regulator is collecting information from 14 brokerages about how they are managing conflicts, including compensation that may motivate brokers to push certain securities to investors, said Susan Axelrod, head of FINRA's member regulation unit, at an industry conference last month.
Among the concerns, Axelrod said in October, are that brokers who receive large financial incentives to move to a different firm may promise their clients new and better securities products for bringing their assets to the new firm.
Those products may be no better, or even worse, than what the client already owns, but the broker earns a commission on the sale.
FINRA's proposal would apply to clients who transfer their accounts to a brokerage in order to stay with an adviser who is switching firms. Brokerages would have to tell those clients about compensation used to entice the broker's move.
While details about the proposal are unclear, it is already causing some consternation, particularly among small brokerages. The plan was "unanimously panned" at a recent meeting of FINRA's Small Firm Advisory Board, according to a person familiar with the matter. "They think, for some reason, that your clients are going to care that you're getting a bonus for moving," said the person, who was not authorized to speak to the press about the meeting and asked not to be named.
If anything, misconduct would be more likely to occur in the year before a broker leaves a firm, the person said. Signing bonuses are typically calculated based on the total revenue generated through selling securities and managing client money a during the previous twelve months. Brokers who want to boost that figure to get a bigger signing bonus elsewhere could push products that clients do not need.
Signing bonuses for top brokers have become outsized over the past year, recruiters and industry lawyers say, with upfront portions as much as 160 percent to around 195 percent of a broker's annual trailing revenue production at top firms.
The idea of disclosing to clients that a signing bonus changed hands will likely "strike fear into a marginal subset of the industry," said Jeffrey Bischoff, a brokerage recruiter in Old Greenwich, Connecticut.
Unknown at present is exactly how far the disclosure would go. A generic disclosure that does not include the specific amount of a broker's bonus is unlikely to scare clients away, said Amy Lynch, president of FrontLine Compliance, in Leesburg, Virginia.
Most advisers do not need to be worried about clients learning about their bonuses, Bischoff said. "If you're an ethical person, you're an ethical person always. You would never do anything to elevate your revenue," he said.
What's more, a disclosure about a signing bonus may appeal to certain clients because it shows their adviser is in demand, Bischoff said. "If they are wealthy clients, they won't begrudge their adviser for getting a bonus to switch firms," he said. (Reporting By Suzanne Barlyn; Additional reporting by Ashley Lau; Editing by Jennifer Merritt and Tim Dobbyn)