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US SEC may gain expanded powers to prohibit broker pay

THE U.S. Securities and  Exchange Commission (SEC) would gain power under an Obama administration proposal to ban pay practices at brokerages and investment advisers and prevent individuals from working in the industry.
According to Bloomberg

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“ The Treasury Department sent Congress legislation last week  that would let the SEC prohibit “sales practices, conflicts of interest and compensation schemes” deemed harmful to investors. The measure lets the agency remove individuals who violate rules from all aspects of the industry, rather than a specific segment such as selling securities or managing money”

President Barack Obama’s SEC proposal is part of the overhaul of financial regulations in response to the worst economic crisis since the Great Depression. Lawmakers have vilified securities firms for selling investors unsuitable products and basing pay on how many transactions bankers execute without regard to whether deals succeed in the long term.

“The SEC would be given broad authority to define those kinds of” pay arrangements it deems inappropriate, Michael Barr, assistant Treasury secretary for financial institutions, told reporters in a briefing. Types of compensation practices the SEC may deem improper might include banks paying brokers more to sell “in-house” investment products, rather than those offered by competitors, he said.

“There has always been a concern that because these people are acting in an advisory capacity, they might be operating under pay practices that are in their interest, not those of their clients,” said Mark Borges, a principal at Compensia Inc., a San Francisco-area pay consultant.

Bloomberg stated that the proposal, which Congress must approve, also would give the SEC authority to impose a so-called fiduciary duty on brokerages offering investment advice. The stipulation requires firms and their employees to put clients’ interests before personal motivations, such as fees.

SEC Chairman Mary Schapiro, in a statement, said “applying tough standards that require financial professionals to put investors first will provide us with needed tools to better safeguard investors.”

The Obama plan targets mandatory arbitration agreements, granting the SEC power to prohibit them in contracts consumers sign with brokers, investment advisers and those who sell municipal bonds. Mandatory arbitration bars customers from suing financial professionals in court.

The measure gives the SEC authority to reward whistle blowers who give the agency tips about those violating all securities laws. The SEC currently has power to pay individuals who provide the agency with tips on insider-trading violations.

Under the legislation, the SEC would use fines it collects from enforcement actions to reward whistle blowers for information that results in “significant financial awards.”


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