Say on Pay Continues Momentum

By Lisa Valentine

Should luxury brands such as Louis Vuitton and Gucci be concerned that their financial services clientele may no longer be able to afford their goods? They should be if Mary Schapiro, Chairman of the Securities Exchange Commission, has any say in the matter. On August 31, Schapiro sent a letter to chief executive officers at broker-dealers reminding them that “substantial inducements” to lure superstar registered representatives to their firms may get these execs in hot water with the federal regulators.

In the open letter, Schapiro expressed dismay that broker-dealer firms are once again offering large up-front bonuses and enhanced commissions to encourage their registered reps to sell, sell, sell financial products. Schapiro goes on to say that CEOs of there firms have “significant supervisory responsibilities…under federal securities laws” to guard against sales that are not in the best interest of the investor.

Pay practices in the financial services industry will continue to be a political hot button. Late in July, Congressman Barney Frank, a democrat from Massachusetts, introduced H.R. 3269: the Corporate and Financial Institution Compensation Fairness Act of 2009. The bill, which amends the Securities Exchange Act of 1934,  passed by a margin of 237 to 185 in the house.

The bill has two parts. The first, commonly called “say on pay” gives shareholders of publicly traded corporations the right to vote on executive compensation. It also mandates a separate non-binding shareholder vote on “golden parachute” compensation. And, it requires all publicly traded companies to have compensation committees made up of independent consultants.

The second (and most troubling) part of the bill focuses on “covered financial institutions” (including broker-dealers and investment advisers) and requires compensation reporting of the structure of any incentive-based compensation.

Is this bill, ahem, unprecedented? Yes. Does it give regulators an exceptional amount of control over compensation? Yes. Is it a positive move? Not really. The bill diverts attention from regulatory failings and points the blame at broker-dealers who sold investment products that were not in the best interest of their clients. These broker-dealers could be argued to be unscrupulous at times, but isn’t that the nature of sales—even sales of financial products? Whatever happened to “buyer beware?” Tightening regulatory controls over compensation will have little impact on true regulatory reform and will be just one more issue that the already overburdened SEC will have to police.