It’s a lucrative, but dangerous, time to be a registered representative. On the one hand, broker-dealers are using large bonuses and other compensation “sweeteners” to attract new brokers or retain existing ones. On the other, a new FINRA rule is making it more likely that arbitration claims will ding a rep’s permanent U4. Result of both changes: if a rep engages in inappropriate sales practices to “validate” extra compensation and this triggers an arbitration claim, his or her reputation may take a big hit.
Compensation sweeteners have become so widespread that SEC Chairman Mary L. Schapiro issued a warning to broker-dealer executives that such inducements might lead to bad sales practices. “Some types of enhanced compensation practices may lead registered representatives to believe that they must sell securities at a sufficiently high level to justify special arrangement that they have been given,” Schapiro wrote. “These pressures may in turn create incentives to engage in conduct that may violate obligations to investors.”
If brokers succumb to temptation, then the arbitration process may become a lot more damaging. Prior to a new FINRA Rule that took effect in May 2009, complainant attorneys often left advisor names off complaints in order to go after deep corporate pockets. However, with the new Regulatory Notice 09-23, broker-dealers must within 30 days of receiving a claim decide whether the advisor is likely to have committed the alleged offense. This decision must be made regardless of whether or not the case has been arbitrated. If the advisor is likely to have committed the offense, the firm is required to enter the claim on the advisor’s U4 form.
The intent of the new FINRA rule is to make sure the system weeds out rogue brokers as soon as possible. But now advisors who are innocent will be at the mercy of their broker-dealers to make a fair decision about marking the incident or not. And if the firm makes the wrong call, the broker will end up with a permanent black mark on his or her record, which will raise questions about their integrity.
As with most compliance matters, the solution is prevention. Enter into new compensation arrangements with your eyes wide open and don’t engage in unethical sales practices in order to validate those arrangements. By doing what’s right, you’ll hopefully prevent claims and avoid arbitration altogether.