FINRA Proposes Amended Broker Compensation Rule

FINRA Proposes Amended Broker Compensation Rule

The Financial Industry Regulatory Authority released on Wednesday new regulations aimed at enhancing investors' understanding of the impact of their broker changing firms and what that would mean to them.

The new proposal comes almost a year after the  regulator withdrew a previous, heavily criticized version that would have required brokers disclose the monetary incentives they received from their new firm.

“We’ve tried to do a cost-benefit analysis and a range of consumer testing in regards to the disclosures we described in the notice to members,” says Rick Ketchum, CEO of FINRA, said in comments to reporters on Wednesday. He added the results of the consumer testing demonstrated the “disclosures are valuable to investors by and large.”

According to the regulatory notice, FINRA’s proposal would require firms to give investors "educational communication" on the implications of moving with an advisor to a new broker/dealer. 

The communication would need to be provided at the time of, or shortly after, the new firm reaches out to the client about the transfer of assets. Information intended to be communicated to the client includes: 

  • Are there financial incentives received by the representative that may create a conflict of interest?
  • Are there assets that may not be directly transferrable and, as a result, could incur costs to liquidate?
  • What are the potential costs related to transferring assets, including differences in fees?
  • What are the differences in products and services between the customer’s current firm and the recruiting firm?

FINRA’s previous proposal, initially filed with the SEC in March 2014, required advisors to disclose to clients when they receive more than $100,000 in compensation (including signing bonuses and other payments) to switch firms. 

FINRA is seeking comments on the revised broker compensation proposal through July 13, 2015. Ketchum noted that the proposal is likely to be on the agenda of the July board of directors meeting.

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