Brokerages Warned by SEC Over Conflicts of Interest Tied to Pay

Lydia Beyoud
Wed, August 3, 2022 


(Bloomberg) -- Brokerages and money managers are being warned that they need to do more than just disclose conflicts of interest associated with employee pay programs to avoid trouble with the US Securities and Exchange Commission.

SEC staff issued a new bulletin on Wednesday telling firms not to take a “check-the-box” approach to complying with conduct rules. The agency said that brokers must identify, disclose and in some cases eliminate conflicts of interest.

Money-managers and brokerages should pay particular attention to conflicts of interest that can arise from compensation and pay incentives for employees, the SEC said. They should consider if they could cause brokers or advisers to put their interests over those of their clients.

“Firms may adopt a range of measures to mitigate conflicts of interest for compensation arrangements for financial professionals, depending on the nature and magnitude of the conflicts they seek to address,” the SEC said. “The greater the reward to the financial professional for meeting particular thresholds,” the greater the concern, the agency added.

Some initiatives in particular may pose risks, the regulator indicated, such as programs based on meeting benchmarks, quotas or other performance metrics established by the firm.

The securities industry and investor advocates have been fighting for more than a decade over conduct rules that financial professionals must follow when offering investment advice or recommending products. In March, SEC staff said that brokers and financial advisers must abide by similar codes of conduct when helping retail clients choose which type of account to open.