Friday, October 23, 2015

FINRA Broker Compensation Sweep Continues


FINRA periodically conducts sweeps on particular regulatory topics. In its most recent Annual Priorities Letter, FINRA claimed that conflicts of interest represent a recurring challenge that contribute to compliance and supervisory breakdowns which can lead to firms and registered representatives, at times, compromising the quality of service they provide to clients.
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FINRA seems to be fixated on compensation, despite the complete lack of published statistics or facts to support its conclusion that there is in fact an issue. Regardless, our firm, and our clients must deal with the premise, and FINRA's fixation.

FINRA has announced that it intends to continue its review of this "issue" and will "continue our assessment of the efforts employed by firms to identify, mitigate and manage conflicts of interest, specifically with respect to compensation practices."

Fortunately, FINRA has published its Exam Letter, giving firms a basic heads-up and has released a list of 19 questions that it intends to ask. Naturally, FINRA is not bound by this list, and can expand it whenever it pleases.

FINRA has limited the time period to August 2014 through July 2015, we request that responses to the questions and requests below be provided in writing by no later than Friday, September 18, 2015.

The list is long, and encompasses the following questions. When producing documents to FINRA in this, or any investigation, do yourself a favor - number the pages of the documents that you produce so that YOU can identify the production later. When we produce documents to regulators, we stamp the documents "SA&C0000001" and so on. Later, if the investigation heats up, we can readily identify the document, the fact that it was produced by our client, and when it was produced. Today, stamping documents with Adobe takes seconds, not hours, and should be performed in every document production.

Enough lecturing, here is what FINRA is looking for. Keep in mind that you can modify some of this, if the request is particularly onerous for your firm. We have successfully limited and/or modified FINRA requests on countless occasions to fit our client's particular situations.:

  • Identify and describe the composition of the departments or committees that are responsible for reviewing and approving compensation policies for the firm's registered persons, including supervisory personnel, involved in retail brokerage.
  • Describe the role of the Board in reviewing and approving individuals' compensation packages as well as compensation policies as a whole.
  • What role do corporate functions – such as finance, human resources, compliance, or risk – play in the review and approval of business line remuneration policies?
  • Identify and describe the controls utilized to identify compensation-related conflicts of interest.
  • Identify the team(s) or individual(s) that are responsible for developing and implementing the identified controls.
  • Describe the initial review and approval process that occurred for the identified controls.
  • Identify and describe the controls (e.g., neutral grid, fee-capping, compensation penalties) utilized to manage compensation-related conflicts of interest.
  • Identify the team(s) or individual(s) that are responsible for developing and implementing the identified controls.
  • Describe the initial review and approval process that occurred for the identified controls.
  • Identify and describe surveillance efforts or supervisory processes that have been implemented to assess whether potential compensation-related conflicts of interest are materializing in your firm's retail brokerage business.
  • Describe specific underlying surveillance/supervision efforts that have been implemented. Include the identity of the department(s) responsible for the surveillance or supervision.
  • Describe whether surveillance/supervision efforts are performed on a routine basis and, if so, how often.
  • Describe escalation procedures in place for situations that suggest a compensation-related conflict of interest is materializing.
  • Indicate how many compensation-related conflict of interest escalations occurred during the period of August 2014 through July 2015.
  • Describe how current compensation structures balance short-term incentives for registered representatives and clients' long-term interests. Include a description of any components of compensation structures designed mitigate compensation-related conflicts of interest.
  • If changes to compensation structures were made during the period of August 2014 through July 2015, summarize each change and identify the strategic goal of each change.
  • Identify and describe the terms and conditions of each standardized enhanced and deferred compensation package your firm offers to recruit or retain registered representatives including who is authorized to provide such packages and who must approve such packages. Indicate the degree to which these compensation packages are contingent upon a registered persons' production derived from particular product types or product families. Identify the number of registered representatives currently receiving compensation from each standardized enhanced or deferred compensation package.
  • Describe the use of non-standard (i.e., negotiated) enhanced and deferred compensation packages by your firm to recruit or retain registered representatives. Indicate the degree to which these compensation packages are contingent upon a registered persons' production derived from particular product types or product families. Identify who is authorized to provide such packages and who must approve such packages. Further, identify the number of registered representatives currently receiving non-standard enhanced and deferred compensation packages.
  • Identify production thresholds that entitle any registered representative to higher compensation ‘ whether paid in the form of higher commission payout, higher base salary or higher discretionary bonus. Indicate whether these thresholds are communicated to registered representatives.
  • Describe the terms and conditions of any direct production penalties in place which, based upon events occurring, can result in a decrease in compensation paid to registered representatives.
  • Describe the approach to compensating direct and indirect managers of registered representatives involved in sales to retail accounts, including Sales Managers (or similar function), Business Supervisors and Compliance Personnel. Indicate whether compensation packages are tied to production either through direct commission payout, higher base salary or discretionary bonus. Indicate if thresholds for higher compensation are communicated to managers.
  • Describe broadly how products approved for sale are displayed or otherwise communicated to registered representatives. For example, are products presented by product category (e.g., Mutual Fund or Annuity)? Is an internal search feature available?
  • For each method used by your firm to display approved product to registered representatives, describe how the display order of products is determined and identify the group or department that makes the decision.
  • Describe any methods employed or processes in place to promote the sale of specific products or categories of products. (Example: Preferred Product List, Enhanced Commission Payouts, etc.)
  • Using the table in Attachment A identify the products offered to retail accounts and describe all types of income received for each product (e.g., commission/concession, 12b-1 fee, income from other revenue sharing arrangements, payment for shelf space, etc.) For each type of income, state whether the income is split with registered representatives on a per transaction basis pursuant to a payout schedule or other terms.
  • Describe your firm's policy for permitting third-party product or sponsor representatives to meet with registered representatives. Include details about requirements, if any, for supervisors or managers to attend.
  • Describe your firm's policy for permitting registered representatives to attend off-site, overnight educational session that are sponsored by issuers or product sponsors.
  • Identify by name the Top 10 proprietary or affiliated products as well as the Top 10 independent products sold to retail accounts during the period of August 2014 through July 2015. Total revenue to your firm for each product should be the measurement used in identifying products identified on each list.
  • Identify any flat fee or annual payments that your firm has received to make a product available for sale by its registered representatives.


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The attorneys at Sallah Astarita & Cox are experienced securities regulatory attorneys, having served at SEC Senior Enforcement Attorneys, in-house and outside counsel to dozens of brokerage firms, including some of the country's largest firms, as well as criminal prosecutors. Our experience can guide you through the examination process, help you to avoid potential pitfalls, and hopefully structure a result that causes the least amount of pain for you and your firm. Call our office at 212-509-6544 for more information. We represent investors, brokers and firms nationwide, and our attorneys have been doing so for decades.



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