Saturday, August 1, 2009

Compensation - for the house or customers' benefit matters - Print "Pay BOX" on customers' account statements, what's to hide?

When it comes to parsing out the interests and compensation of ALL personnel in the financial services industry (FSI) including Wall St securities broker dealers, commercial banks, finance companies and insurance companies strongest consideration regarding compensation regulation, if any, should hinge on one question.

The question.
Whose interests are directly supposed to benefit from the activity?

If it's the "house" or as FSI describes it "Proprietary trading" or certain Off balance sheet, special purpose entities SPE's regulation, if any may be proscribed by requiring substantial personal skin in the game and any resulting incentive compensation be in the form of restricted stock, long vesting schedules, and in non transferable, non-diversifiable instruments -and certainly NOT cash. The payment of CASH compensation for asset - based investment gains at the margin of industry and market competition is tantamount to a form of illegal "conversion".

Again - ban CASH compensation for ASSET - based investment gains. Cash payment for salary (not incentive) is preferable - could start with an eye to the following as a guage - what is a reasonable living, city - indexed professional wage? Plus estimated growth in the US GDP, CPI inflation, and the FSI industry.

The unique nature of this industry MUST be understood to address the roots of the compensation question. Let us begin with all manner of principal - agent conflicts. Second, FSI measures and PAYS FOR (largely, but not exclusively when it comes to the "House" account) performance based on ASSET values, ASSET values are subject to marginal pressures, and can, as we have witnessed, leverage to the extremes. Third, the chiefs must be paid more than the warriors compensation philosophy needs to be exposed and subject to critical examination; as the chiefs generally, are popularly "elected" as only FSI's players understand, define and ultimately control the "bartering and negotiating- based" cultures. Said in the parlance of the street - make no mistake, NO FSI CEO has ever been promoted to that role or even along the way without the "blessings" of the most highly compensated talent ok? It's like what do you do when you get to a red light? Stop, it's just the way it is.

Based upon the foregoing at the end of the day, at the entity level, the inverted pyramids of compensation dollars paid compared to the aggregate talent pool must be understood.
And calendar - based "winner take all" compensation, like any new season in professional sports, is in many instances, not the appropriate measurement of performance.

If the activity is for and on behalf of public, arms-length customers, such activity should be subject to on-the-books-for-decades (for example, ERISA 1974, the Prudent Investor Act since the 1990's as has been adopted by over 44 states plus case law and regulatory opinions) fiduciary and or suitability standards of care.

And the dollar amount of any and all revenue recognized by the FS entity should be one and the same dollar amount PLAINLY printed in a box on the first page of each customer's account statement. This burden upon full disclosure will NOT take substantial time to comply. Why? For years all FS entities have disaggregated the river of revenue and rolled it up from each trade ticket, broker's book of business, each branch office, each regional office, each product or service area then up to the firms set of books. Substantial sums are and have been spent on management and accounting systems for years - so there is a robust group of data, systems and personnel to EASILY print the "Pay Box". Many of these firms participated in the SEC's 1995 Tully report, many of these firms participate today in the "McLagan"report to learn how they stack up against the rest of the players - hello to Bruce.

This brings us back to a more essential question.
When the various entities, interests participate in our "capital markets" which participants enjoy certain advantages? There are many, however, it's clear, on a comparative advantage basis that "public customers" are generally not possessed of advantages especially in light of the the broker dealers duty of best execution. Beginning with the proprietary concept I've called the "half life of information" of which Flash order trading and resulting "skimming" although technically "legal" is the most recent example. Additionally, for years the dollar amounts paid by public customers for bond mark-ups or commissions for certain mutual fund share classes, annuity, life and other insurance contracts are NOT plainly printed for the customer to see. Why - what's to hide?

Begin there - these are easy-to-require steps, which in the aggregate may begin to restore public investors' trust and confidence in the "system" heretofore known as the "Securities Industry" such that "Public securities markets evenly benefit ALL the public not just certain advantaged, less than public self interests"

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