SEC proposes broker, adviser pay rules

By Sarah N. Lynch

WASHINGTON (Reuters) - U.S. securities regulators issued a proposal on Wednesday to curb bonuses at brokerage and investment advisory firms over the objections of Republicans on the panel and even some doubts expressed by Chairman Mary Schapiro.

The Securities and Exchange Commission voted 3-2 to issue for comment a plan for the wealth management industry that is substantially similar to one proposed by the Federal Deposit Insurance Corp last month for banks.

The measures, required by last year's Dodd-Frank financial law, are aimed at reducing incentives for executives and other top employees to take excessive risks.

They require more disclosure of pay schemes and in some cases deferral of bonus money to later years.

Some SEC members were concerned by how the agency's pay proposal would affect the largest brokerage firms and financial advisory companies, which would include units of large banks such as Morgan Stanley and Bank of America.

The plan would also likely hit some advisers of large hedge funds as well, although the SEC did not elaborate on which particular companies might be impacted.

"Larger broker dealers and investment advisers may find it more difficult to recruit and retain quality personnel," Republican Commissioner Troy Paredes told the SEC meeting. "It is potentially compromising the competitiveness and capability of these financial institutions."

Nevertheless, the broader U.S. plan to limit financial services pay is markedly softer than the European Union, which in December set guidelines that top bankers be limited to receiving 20 percent of their annual bonuses upfront in cash, with some exceptions.

In other measures mandated by Dodd-Frank, the SEC on Wednesday proposed reducing money market fund reliance on credit-ratings and extended the comment period on a plan to restrict the voting power of large financial companies in derivatives clearinghouses.


One part of the SEC's proposal would target broker-dealers and investment advisers with proprietary assets over $1 billion. Any firm that meets that threshold would need to make disclosures to regulators about their pay structures.

Those firms would also generally be banned from creating pay schemes that may lead executives, directors or principal shareholders to take inappropriate risks or take actions that result in a material loss.

Those provisions are expected to affect around 132 brokerage companies and 70 investment advisory firms. But the SEC did not provide detail on which individuals at the firms may be impacted.

David Tittsworth, executive director of the Investment Adviser Association, doubted the proposal would affect a large number of advisers, expecting it would only apply to publicly traded firms, or those affiliated with a large bank or broker.

Danny Sarch, a brokerage industry recruiter based in White Plains, New York, said the SEC's proposal is misdirected, partly because brokers lost a lot of money during the financial crisis, showing their interests were tied to shareholders'.

"Retail brokers were not responsible for the financial meltdown," Sarch said.

SEC staff and commissioners said they were keen to hear from the public about whether the proposed compensation structure was properly tailored to different business models, particularly investment advisers.

Schapiro said she was hoping in particular to receive comments about private fund advisers, "given how they often structure their compensation."

"This is an area where we want to be very attuned to unintended consequences," she said.


The SEC on Wednesday also began to tackle the removal of credit-rating references in federal regulations affecting money market mutual funds.

In the area of over-the-counter derivatives, the SEC proposed new governance standards for clearinghouses and also reopened the public comment period on a contentious rule that would place limits on the voting power that financial firms can wield in derivatives clearinghouses and trading facilities.

The plan on voting caps has been widely opposed by big Wall Street banks, although the Justice Department's Antitrust Division has said it does not go far enough.

The governance and operations proposal addresses the financial resources that clearinghouses must hold to withstand defaults by members. It also includes provisions to prevent clearinghouses from denying memberships to smaller firms.

Major clearinghouses and trading platforms include LCH.Clearnet, IntercontinentalExchange's ICE Trust, and Tradeweb, a trading platform majority owned by Thomson Reuters and minority-owned by big banks.

(Reporting by Sarah N. Lynch in Washington; Additional reporting by Helen Kearney in New York; editing by Tim Dobbyn)