Bonuses for Growing Assets ‘OK’ Under Reg BI–SEC’s Clayton
Securities and Exchange Commission Chairman Jay Clayton told a U.S. senator on Tuesday that he sees nothing wrong with incentivizing brokers to grow their books, and doesn’t expect the regulator’s proposed Regulation Best Interest to prohibit such bonuses.
Responding to Sen. Catherine Cortez Masto’s remark during a Banking Committee oversight hearing that “just about any incentive works against the best interest of the client,” Clayton said investors recognize that brokers need to be paid and that success should be rewarded.
“You should make more money” for increasing assets under management, Clayton said, adding that even investment advisors subject to the the rigorous fiduciary standard get more for managing more. “That’s the way an investment advisory firm works,” he told the Democratic senator from Nevada.
Brokerage firms have not shied away from introducing asset growth and account growth incentives into their 2019 compensation plans (and, in Merrill Lynch’s case, penalties for missing goals). The plans have not been publicly challenged, but Clayton’s words will likely ward off any internal concerns that executives may have had about whether their growth incentives might conflict with the regulator’s goal of enhancing existing suitability standards.
The now-vacated fiduciary standard that the Obama Labor Department had proposed for brokers on retirement account sales would have prohibited bonuses tied to paying new hires for hitting client growth and asset targets in future years.
The SEC’s proposed customer-care package of rules has been criticized for failing to define “best interest,” and for failing to clarify where it will fit on the spectrum between the existing suitability standard for brokers and the more rigorous fiduciary standard for investment advisors.
Prodded by Sen. Elizabeth Warren (D-Mass.) to be more explicit about the different standards of care, Clayton said that the best-interest standard will be similar to the fiduciary rule and that the Commission will clarify it. “It’s the same,” Clayton said. “The fundamental duty is that the broker cannot put his or her interest ahead of the clients.”
“If it’s the same, just use the same words,” Warren said.
“We may do that,” Clayton responded.
He did not acquiesce to Warren’s suggestion that the SEC simply discard its plans to allow firms to mitigate most conflicts through disclosure and adopt a fiduciary standard across the board for brokers and advisors.
Reg BI is intended as a “flexible rule” in the way it directs brokers and firms to “mitigate or eliminate conflicts of interest,” SEC Trading and Markets head Brett Redfearn said recently, and Clayton on Tuesday said disclosure gives advisers significant leeway even under the fiduciary standard.
“Advisors are allowed to contract around this standard,” he said, noting that he wants more people to understand such latitude. Advisors can do things that “cut back” on the fiduciary standard if they have “informed consent” from customers, he said.
Senator Cortez Masto toward the end of the hearing asked Clayton if she had understood correctly that he hoped to clarify the “best interest” term, but her session time ran out before he responded.
Clayton did reiterate his opposition to product-related sales contests that offer trips and other incentives, which he said is a major concern of investors.
“What they don’t want is hidden incentive, or incentives that are clearly inconsistent with making a recommendation that’s in the best interest of the client,” he said.
