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94-69 Committee On Compensation Practices Requests Comment;

Comment Period Expires October 14, 1994


Senior Management
Legal & Compliance

An Open Letter To Members Of The Financial Services Industry Regarding Compensation Of Retail Brokers And Their Supervisors August 29, 1994

As you may be aware, Securities and Exchange Commission Chairman Arthur Levitt asked us to serve on a committee to examine the securities industry's compensation practices and to highlight areas of potential conflicts of interest as well as examples of particularly effective procedures for managing the broker-investor relationship. The Committee is seeking to identify practices that most effectively eliminate, reduce, or mitigate these conflicts of interest.

Specifically, the Committee's mission is to:

  • Review industry compensation practices.

  • Identify actual and perceived conflicts of interest for both brokers and managers.

  • Identify the "best practices" used in the industry to eliminate, reduce, or mitigate such conflicts.

The Committee is particularly interested in any conflicts that exist at the time of sale. Simply stated: When a responsible broker can choose among a large number of reasonable investments, what influences his/her recommendation? Does the broker place the investor's interest first? To what extent do compensation practices influence a broker's recommendation?

We hope that this Committee's work will initiate a dialogue within the industry about the best compensation practices and encourage firms to compete on the basis of how they manage these real and perceived conflicts.

As part of the Committee's process, we would like your help and your views on these issues. We are not seeking information about any specific compensation program at any particular firm. Rather, we are seeking examples of how current compensation practices affect sales behavior, as well as examples of practices that eliminate or reduce conflicts.

The Committee would like your thoughts on what impact, if any, the following compensation practices have on sales behavior: differentiating compensation by product; flat fees versus transactional commissions; recruitment practices (e.g., up-front payments and increased payouts); compensation for fixed income products (e.g., credits); sales contests or other incentive programs; and supervisor compensation.

Similarly, many in the industry have developed practices designed to align closely the broker's interest with that of the client. The Committee is interested in your observations regarding such practices, including supervision and other management techniques, compliance and training programs, and disclosure.

We want to emphasize that the above are only examples of the kinds of practices that we are interested in examining; they are in no way intended to limit any observations or comments you may have on this subject. The Committee welcomes any insights you may wish to provide, including those based on your experiences with experimental or pilot programs.

We hope you will take the time to respond and share your views with us. Please forward your comments to:

Professor Samuel L. Hayes III
Jacob H. Schiff Professor of Investment Banking
Harvard Business School, Morgan 375
Soldiers Field Road
Boston, MA 02163
Fax: (617) 496-6592

Please respond by Friday, October 14, 1994. Thank you in advance for your assistance. Sincerely,

Daniel P. Tully
Chairman, Committee on Compensation Practices
Chairman and Chief Executive Officer
Merrill Lynch & Co., Inc.

Warren Buffett
Chairman and Chief Executive Officer
Berkshire Hathaway Inc.

Samuel L. Hayes III
Jacob H. Schiff Professor of Investment Banking
Harvard University, Graduate School of Business Administration

Raymond A. Mason
Chairman and Chief Executive Officer
Legg Mason, Inc.

Thomas O'Hara
Chairman of the Board
National Association of Investors Corp.

John F.Welch, Jr.
Chairman and Chief Executive Officer
General Electric Company

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