FINRA Manual: Contents
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15-19 FINRA Requests Comment on a Proposed Rule to Require Delivery of an Educational Communication to Customers of a Transferring Representative; Comment Period Expires: July 13, 2015
Request for Comment
Referenced Rules & Notices
FINRA Rule 4512
Conflicts of Interest
Customer Account Transfers
FINRA seeks comment on a proposed rule that would require a member firm that hires or associates with a registered representative (recruiting firm) to provide an educational communication to former retail customers who the member, directly or through the transferring representative, attempts to induce to transfer assets to the recruiting firm or who choose to transfer assets to the recruiting firm. The educational communication would highlight the potential implications of transferring assets to the recruiting firm and suggest questions a customer may want to ask to make an informed decision. The recruiting firm would be required to provide the educational communication at or shortly after the time of first contact with a former retail customer regarding the transfer of assets to the recruiting firm.
The proposed rule text is available as Attachment A. The proposed educational communication is available as Attachment B.
Questions regarding this Notice should be directed to:
FINRA encourages all interested parties to comment on the proposal. Comments must be received by July 13, 2015.
Comments must be submitted through one of the following methods:
Marcia E. Asquith
Office of the Corporate Secretary
1735 K Street, NW
Washington, DC 20006-1506
To help FINRA process comments more efficiently, persons should use only one method to comment on the proposal.
Important Notes: All comments received in response to this Notice will be made available to the public on the FINRA website. In general, FINRA will post comments as they are received.1
Before becoming effective, the proposed rule change must be authorized for filing with Securities and Exchange Commission (SEC) by the FINRA Board of Governors and must be filed with the SEC pursuant to Section 19(b) of the Securities Exchange Act of 1934 (SEA).2
Background & Discussion
FINRA remains concerned that retail customers may not be aware of important factors to consider in making an informed decision whether to transfer assets to their transferring registered representative's new firm. Therefore, to provide former customers3 with a more complete picture of the potential implications of a decision to transfer assets to a new firm, FINRA is requesting comment on a proposed rule to require delivery of an educational communication that highlights key considerations in transferring assets to the recruiting firm, and the direct and indirect impacts of such a transfer on those assets.
In developing the proposed rule, FINRA considered the comments received in response to the initial proposal filed with the SEC in March 2014.4 The initial proposal included two components: (1) a disclosure obligation to former retail customers who the recruiting firm attempts to induce to follow a transferring registered representative; and (2) a reporting obligation to FINRA where a transferring representative receives a significant increase in compensation. The disclosure obligation would have required a member recruiting firm to disclose to former customers ranges of recruitment compensation that the representative has received or will receive in connection with moving firms and the basis for that compensation (e.g., asset-based or production-based). In addition, the initial proposal would have required disclosure if a former customer would incur costs to transfer assets to the member firm that would not be reimbursed by the member firm and if any of the former customer's assets were not transferrable to the recruiting firm. The initial proposal would have required disclosure for one year following the date the registered representative began employment or associated with the recruiting firm.
Commenters to the initial proposal conveyed concerns about the proposal's competitive implications and operational aspects, as well as the effectiveness of the proposed compensation disclosures.5 In June 2014, FINRA withdrew the initial proposal to further consider the comments.6
FINRA requests comment on a proposed rule that would require delivery of a FINRA-created educational communication focused on key considerations for a customer who is contemplating transferring assets to the recruiting firm.7
Content of Communication
The educational communication would highlight the potential implications of transferring assets to the recruiting firm and suggest questions the customer may want to ask to make an informed decision regarding: (1) whether financial incentives received by the representative may create a conflict of interest; (2) assets that may not be directly transferrable to the recruiting firm and as a result the customer may incur costs to liquidate and move those assets or inactivity fees to leave them with his or her current firm; (3) potential costs related to transferring assets to the recruiting firm, including differences in the pricing structure and fees imposed between the customer's current firm and the recruiting firm; and (4) differences in products and services between the customer's current firm and the recruiting firm.8 The educational communication is intended to prompt a former customer to make further inquiries of the transferring representative (and, if necessary, the customer's current firm), to the extent that the customer considers the information important to his or her decision making.
Delivery of Communication
The proposed rule would require the educational communication to be provided at or shortly after the time of first contact with a customer regarding the transfer of assets to the recruiting firm. If the contact is in writing, the educational communication must accompany the written communication. If the contact is by electronic communication, the recruiting firm may hyperlink directly to the educational communication. If the first contact is oral, the educational communication must be sent to the customer within three business days or with any other communication sent by the recruiting firm to the former customer in connection with a potential transfer of assets, whichever is earlier. In addition, if the first contact is oral, the recruiting firm or representative must inform the former customer that he or she will be receiving a document that contains important considerations in determining whether to transfer assets to the recruiting firm.
The proposed rule further would require the educational communication to be provided to a former customer who seeks to transfer assets to an account assigned, or to be assigned, to the representative at the recruiting firm absent contact (e.g., where a customer decides to transfer assets after learning from a general announcement or other sources that his or her registered representative has changed firms). In those circumstances, the communication must be included with the account transfer approval documentation. Although the proposal does not specify supervisory procedures, FINRA expects that firms can implement a system reasonably designed to achieve compliance with the delivery requirements through training, spot checks, certifications or other measures.
The requirement to provide the communication would continue to apply for six months following the date that the registered representative begins employment or associates with the recruiting firm.
The requirement to provide the communication would not apply when the former customer who the member or registered representative attempts to induce to transfer assets expressly states that he or she is not interested in transferring assets to the recruiting firm. If the former customer subsequently decides to transfer assets to the recruiting firm without further individualized contact within the period of six months following the date the registered representative begins employment or associates with the member, then delivery of the communication with the account transfer approval documentation is required.
Reporting to FINRA
The proposed rule does not include the reporting obligation to FINRA that was in the initial proposal. FINRA will instead consider potential customer harm resulting from recruitment compensation as part of its broader conflicts management review.
FINRA believes the proposal is an effective and efficient alternative to the initial proposal that would achieve the regulatory objective of informing decisions by retail customers whether to transfer assets to the recruiting firm, while reducing the direct costs on firms to provide the educational communication and the operational challenges of the initial proposal. In place of mandating disclosure of the magnitude of recruitment compensation paid, the proposal would highlight in the educational communication that firms may pay financial incentives to recruit or retain representatives and encourage retail investors to consider whether the incentives may impact the advice they receive. FINRA also considered, as some commenters suggested, a general disclosure requirement of the fact of additional compensation received by a transferring representative. However, FINRA believes the revised proposal is a more effective approach; the educational communication allows for more context and explanation about financial incentives and is more likely to prompt a discussion with the transferring representative or current firm.
FINRA tested the educational communication with a diverse group of retail investors. In general, the investors indicated that the educational communication effectively conveyed important and useful information. Investors also indicated that the communication identified issues to consider that they had previously been unaware of and that would be meaningful in making a decision whether to transfer assets to the representative's new firm.
The proposed rule is intended to provide investors with relevant information to make an informed decision whether to transfer assets to their representative's new firm. FINRA believes the proposed rule would enhance investor protection by alerting retail customers to important considerations that may impact their costs and investment objectives and performance. FINRA seeks comment on the usefulness of such a disclosure to a representative's former retail customers.
FINRA recognizes that a member firm that hires or associates with a registered person would incur costs to comply with the proposed rules on an initial and ongoing basis. Member firms would need to establish and maintain written policies and procedures reasonably designed to ensure compliance with the proposed rule, including monitoring communications by the transferring representative and other associated persons of the recruiting firm with former retail clients of the representative. The compliance costs would likely vary across member firms based on a number of factors such as the size of a firm, the extent a firm hires registered representatives from other firms, and the effectiveness and application of existing procedures to the types of communications that must be monitored under the proposal. FINRA seeks comment about the specific sources of these costs, their magnitude and how the costs might differ with a firm's size, business model and other relevant factors.
Request for Comment
In addition to generally requesting comments, FINRA specifically requests comment regarding whether the proposed rule should:
FINRA also specifically requests comments on the economic impact and expected beneficial results of the proposed rule.
We request quantified comments where possible.
1. FINRA will not edit personal identifying information, such as names or email addresses, from submissions. Persons should submit only information that they wish to make publicly available. See Notice to Members 03-73 (November 2003) (Online Availability of Comments) for more information.
2. See SEA Section 19 and rules thereunder. After a proposed rule change is filed with the SEC, the proposed rule change generally is published for public comment in the Federal Register. Certain limited types of proposed rule changes, however, take effect upon filing with the SEC. See SEA Section 19(b)(3) and SEA Rule 19b-4.
3. The proposed rule would define the term "former customer" to mean any customer that had a securities account assigned to a registered person at the registered person's previous firm. The term shall not include an account of a non-natural person that meets the definition of an institutional account pursuant to FINRA Rule 4512(c). FINRA Rule 4512(c) defines institutional account to mean the account of: (1) a bank, savings and loan association, insurance company, or registered investment company; (2) an investment adviser registered either with the SEC under Section 203 of the nvestment Advisers Act of 1940 or with a state securities commission (or any agency or office performing like functions); or (3) any other person (whether a natural person, corporation, partnership, trust, or otherwise) with total assets of at least $50 million.
4. See Securities Exchange Act Rel. No. 71786 (Mar. 24, 2014), 79 FR 17592 (Mar. 28, 2014) (SR-FINRA-2014-010).
5. See the SEC's website for a list of commenters to the initial proposal.
6. See Securities Exchange Act Rel. No. 72459 (June 30, 2014), 79 FR 36855 (June 30, 2014) (SR-FINRA-2014-010).
7. The text of the proposed rule is set forth in Attachment A.
8. See Attachment B.
Text of Proposed New FINRA Rule
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2200. COMMUNICATIONS AND DISCLOSURES
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2272. Educational Communication Related to Recruitment Practices and Account Transfers
A member that hires or associates with a registered person shall provide to a former customer of the registered person, individually, in paper or electronic form, an educational communication prepared by FINRA when (1) the member, directly or through that registered person, attempts to induce the former customer of that registered person to transfer assets or (2) the former customer of that registered person, absent inducement, transfers assets to an account assigned, or to be assigned, to the registered person at the member.
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