It is Important for Investors to Know about their Broker’s Recruitment Compensation Package


The Financial Industry Regulatory Authority is considering a rule change that would require firms to disclose brokers’ recruitment compensation packages to transferring customers. Brokers who are recruited to change firms often receive financial incentives that may subtly encorage them to engage in unlawful sales practices, such as churning and unsuitable sales, in order to generate the kind of revenues that made the new firm recruit them in the first place.

FINRA’s consideration of the new rule (not yet proposed) follows a period in which the brokerage industry ramped up recruiting bonuses to target unhappy brokers at Wall Street firms. It also follows a review by FINRA earlier this year of conflicts of interest at 14 of the largest broker-dealers focused on broker compensation arrangements (“Finra to consider new disclosure rule,” by Dan Jamieson, InvestmentNews).

The SEC had previously warned firms to do better in supervising supervise brokers who churn or recommend unsuitable securities, and took note of the financial incentives that induce brokers to satisfy production and asset targets rather than focus on what is in their client’s best interests.

Former SEC chairman, Arthur Levitt, during his tenure from 1993 to 2001, called for the disclosure of recruitment packages, but the SEC never acted on his request.

Page Perry is an Atlanta-based law firm with over 150 years of collective experience maintaining integrity in the investment markets and protecting investor rights.