April 13, 1995
TO: SEC RULES COMMITTEE No. 56-95
RE: REPORT OF THE COMMITTEE ON COMPENSATION PRACTICES
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The Committee on Compensation Practices, chaired by Daniel P. Tully of Merrill Lynch & Co.,
Inc., recently issued a report on compensation practices in the brokerage industry. SEC Chairman
Arthur Levitt requested the formation of the Committee in May 1994 as part of a program to address
concerns about actual and potential conflicts of interest in the retail brokerage business. A copy of the
report is attached.
The CommitteeGs mandate was three-fold: (1) to review industry compensation practices for
registered representatives (brokers) and branch managers; (2) to identify actual and perceived conflicts of
interest for both brokers and managers; and (3) to identify the “best practices” used in the industry to
eliminate, reduce, or mitigate these conflicts. In preparing the report, the Committee solicited input
from industry, consumer groups, brokerage firms, and individuals. Several practices that create the
potential for conflicts of interest are identified in the report, including the use by brokerage firms of
transaction-driven compensation, sales contests, differentiated compensation by product or source of
product, undisclosed bonuses, and higher commission payouts paid to transferring brokers. The report
also underscores the idea that “full disclosure of . . . compensation practices . . . can reduce the potential
for conflict and abuse.”
The report further identifies those “best practices” (i.e., activities that are most effective in
serving the interests of all parties to a retail sale or service transaction) presently being used by firms in
the brokerage industry. These practices include, among others, paying identical commissions to brokers
for proprietary and non-proprietary products within a product category; paying a portion of
compensation based on client assets in an account, regardless of transaction activity; prohibiting sales
contests; deferring a portion of brokersG compensation or using stock options or stock purchase plans as
part of compensation; and eliminating up-front bonuses paid to brokers. Finally, the report describes
the roles that both senior management of brokerage firms and investors can play in mitigating conflicts.
Alexander C. Gavis
Assistant Counsel
Attachment