March 5 (Reuters) - An influential trade group for the U.S. securities industry is backing a controversial plan that would require brokers to tell certain clients about compensation they receive to join a different firm, according to a letter dated Tuesday.
The Securities Industry and Financial Markets Association (SIFMA) is concerned, however, about how its key regulator may require brokerages to explain the details to customers.
The plan, introduced by the Financial Industry Regulatory Authority, Wall Street’s industry funded watchdog, would bring more transparency to the incentives that brokerages offer brokers who move to new firms, say Wall Street observers and investor advocates.
“SIFMA supports disclosure of information that is sufficient to inform an investor of the potential conflicts of interest when it may arise in connection with recruiting-related bonus payments,” wrote Ira Hammerman, SIFMA’s general counsel in a letter to Wall Street’s industry-funded watchdog. The group represents hundreds of Wall Street firms.
FINRA is discussing a possible rule that would require brokers to provide details about “enhanced compensation” valued at $50,000 or more after joining a new firm. FINRA asked for the public’s input about the plan in January. Replies are due on Tuesday.
Supporters of such a rule say it 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 may be financial impacts for customers who agree to move firms along with their brokers, FINRA’s chief, Richard Ketchum, has said.
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.
While SIFMA does not oppose the measure, it is concerned about how to convey the information to investors in a way that makes sense. “The most important and relevant information for the client is to understand the potential conflict associated with the payment,” wrote SIMFA’s Hammerman. The disclosure should use simple language, Hammerman wrote.
SIFMA is also concerned about a question in FINRA’s request about whether brokers should disclose details about upcoming recruiting bonuses before they leave their current firms, Hammerman wrote. That measure would be “unworkable” because the soon-to-be new firm could not supervise the broker’s behavior at the firm he or she is leaving, Hammerman wrote.
The group’s support of the broader disclosure idea, however, clashes with views of many respondents who vehemently oppose the idea. Janney Montgomery Scott LLC, for example, believes the rule would ultimately curb competition among brokerages or limit compensation, wrote Carrie Chelko, the brokerage’s deputy general counsel for litigation and regulatory affairs, in a March 1 letter to FINRA.
“It feels like we would be airing our dirty laundry unnecessarily,” wrote Warren Bischoff, who oversees the Washington, D.C. complex for RBC Wealth Management, a unit of Royal Bank of Canada in a January 8 letter. “FINRA will shock clients again and again,” Bischoff wrote.
Letters from 35 respondents, not including SIFMA‘s, appeared on FINRA’s website late Tuesday.
SIMFA’s overall support for the measure does not surprise many securities industry observers who say the disclosures are a sound ethical practice. “As a professional organization, I don’t see how they can oppose it,” said James Fanto, a securities law professor at Brooklyn Law School in New York.