SEC lists broker compensation procedures

In an effort to reduce conflicts of interest between brokers and investors, the U.S. Securities and Exchange Commission (SEC) in Washington has unveiled a report highlighting “best practices” that brokerage firms should use when structuring the way brokers are paid.

The report — which culls the best compensation procedures used by U.S. brokerage houses — singles out current practices that cast a shadow on broker images, Knight-Ridder reports. These include the use of sales contests that urge brokers to sell unwanted inventories, as well as the use of undisclosed bonuses and higher commission payouts to transferring brokers.

After surveying brokerage firms, investors and consumer groups during the last three months, researchers came up with six compensation approaches which firms should consider to avoid conflicts with investors. These include: * using compensation policies that align the interests of investors, firms and brokers, such as paying identical commissions to brokers for proprietary and non-proprietary products within the same family;

* avoiding sales contests based on specific products;

* using regular, non-enhanced commissions for transferring brokers; * adopting policies that promote broker understanding of client objectives, experience and financial position;

* using education and training programs to enhance the quality of broker advice; and

* educating clients with respect to markets, risks and their own responsibilities as investors.

The guidelines are not binding and will not become SEC policy.