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FINRA Seeks to Mitigate Broker Recruitment Conflicts

The Financial Industry Regulatory Authority submitted a proposed rule to the U.S. Securities and Exchange Commission late Wednesday night that would require broker/dealers to provide educational information to customers they’re seeking to bring aboard as part of a new advisors’ hiring process.

Under the new rule, firms onboarding clients of a recently recruited advisor must disclose to investors whether the recruitment bonus or other compensation received by the advisor creates a conflict of interest. Further, the information must also outline any costs associated with transferring client accounts to the new firm and the potential differences in products and services offered at the new b/d.

According to the proposal, these educational materials will be prepared by FINRA (no alternate formats would be permitted), and firms would be required to distribute them to potential new clients within three business days of the first oral or written contact with the new the firm.

“To provide former customers with a more complete picture of the potential implications of a decision to transfer assets, the proposed rule change would require delivery of an educational communication by the recruiting firm that highlights key considerations in transferring assets to the recruiting firm, and the direct and indirect impacts of such a transfer on those assets,” FINRA wrote in its proposal.

In March 2014, FINRA released a compensation disclosure proposal that would’ve required brokers to inform clients of any recruiting compensation they received if the amount was higher than $100,000. The rule was met with strong industry backlash, and FINRA later withdrew it.

While the vast majority of the industry is in agreement that this proposal is far better than the original one, there are still a few concerns, said Don Runkle, director of consulting services at Edgerton & Weaver.

For one, the rule only applies to firms who are transferring client assets over. But why stop at informing just those consumers who are transferring their assets as part of an advisor career change?

“While the disclosure itself may not be overly burdensome, it does seem a tad unfair to put this requirement only on reps who have transferred firms,” Runkle said.

The only real distinction with the advisor who recently transferred is that he or she may have received some sort of compensation as part of the transfer, Runkle said. But many advisors do not receive recruiting packages, or they may only receive payments to help them adjust for the true costs and lost revenue associated with the move.

“There is a bit of a presumption that any recruiting compensation creates a conflict of interest with the clients being solicited, but in many instances, reps are really changing firms because the new firm offers additional (or superior) products or services not available at their prior firm,” he added.

The other big concern is the timing around delivering the disclosure, Runkle said. It is going to be “nearly impossible” for firms to ensure that they meet this three-day requirement in every instance, given that there is no way a firm can definitively know when oral solicitations are made, he said.

“It bothers me to create a rule for which firms can’t really ensure compliance – it basically sets you up for failure,” Runkle says, adding a better solution would have been to require the disclosure to be delivered with any transfer paperwork.  


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