The chairwoman of the U.S. Securities and Exchange Commission is warning broker-dealer firms to be careful with their recruitment efforts, especially when they involve up-front bonuses and other inducements.

Mary L. Schapiro

Mary L. Schapiro wrote the letter to the CEOs of a number of broker-dealer firms because recent press reports indicate they may be engaging in “vigorous recruiting” programs to find new broker-dealer registered representatives.

To avoid registered representatives feeling forced into “hitting increased commission targets,” she suggests that broker-dealer firms to be “particularly vigilant” in monitoring sales practices and investors’ interests. She also suggests that as sales forces expand, firms add the appropriate level of supervisory and compliance infrastructure to ensure proper compliance.

Schapiro said in the letter, dated Aug. 31, that recent press reports “suggest some firms are offering substantial inducements to potential registered representatives, including large up-front bonuses and enhanced commissions for sales of investment products.”

“In light of these reports, I want to remind broker-dealer firms and their CEOs of the significant supervisory responsibilities you have under the federal securities laws to oversee broker-dealer activities, particularly with respect to sales practices,” she said.

Schapiro said the potential compensation may pose risks to customers, as the registered representatives feel “pressures” that may “create incentives to engage in conduct that may violate obligations to investors,” she wrote.

“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 arrangements that they have been given,” according to the letter.

She suggests, for example, that a registered representative may feel “motivated to chum customer accounts, recommend unsuitable investment products or otherwise engage in activity that generates commission revenue but it’s not in investors’ interest.”