SEC Chairman: Beware Broker Bonuses
August 31, 2009 by Mark Ellis
Filed under Business
As the Securities and Exchange Commission continues to clamp down on unscrupulous Wall Street denizens, Chairman Mary Schapiro has written an open letter to U.S. investment CEOs that warns against using bonuses to compensate brokers. According to Schapiro, such a practice encourages brokers to aim for more sales at the expense of the customer’s interest.
In her letter, Schapiro took note of recent news stories that revealed many CEOs using increased commissions and upfront bonuses to hire brokers, warning that such a practice ends up benefiting the broker more than the customer. By giving brokers large bonuses, Schapiro argues, the brokers feel pressured to do whatever it takes to sell securities, potentially infringing upon their ability to be open and honest with investors.
Brokers who feel that they need to increase their sales volumes may coerce investors into purchasing suboptimal securities or encourage them to purchase more securities, simply to make larger commissions. However, brokers are only supposed to make recommendations to customers based on the customer’s best interest, not their own.
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