Thursday, July 16, 2015

NASAA Critical of FINRA Proposal on Disclosures Required of Brokers Bringing Customers to New Firms

By Matthew Garza, J.D.

NASAA has expressed disappointment with a re-proposed FINRA rule that softened disclosure requirements for brokers that transfer retail customer accounts to a new firm. Responding to a second request for comments, NASAA President William Beatty said that the watered-down proposal was inconsistent with FINRA’s recent emphasis on conflicts of interest and putting customers’ interests first.

The proposed rule would require a FINRA-registered firm that recruits a broker and induces retail customers to transfer assets to the recruiting firm to send a communication highlighting the implications of the asset transfer, as well as suggest questions the customer should ask.

First proposal. The initial proposal on the content of the communication called for disclosure of compensation that the representative received or would receive in connection with the transfer to a new firm and whether the compensation was asset-based or production-based. That proposal was withdrawn after commenters complained about operational aspects of the proposal and its effect on competition.

Beatty said NASAA’s initial comment about the rulemaking, submitted in March 2013 in response to FINRA Regulatory Notice 13-02, supported requiring written disclosures about enhanced compensation programs, particularly where the compensation was based on the representative’s future sales performance. NASAA asked for timely, detailed disclosure to customers of actual dollar figures paid to representatives that move accounts to new firms and discouraged “vague references to percentage payouts and generalized language.”

Re-proposal. The re-proposed version of the rule called for an “educational communication” highlighting the implications of the asset transfer. FINRA said the intent of the communication was to prompt the customer to ask about: (1) whether financial incentives received by the transferring representative created a conflict of interest; (2) if assets that may not be directly transferrable to the recruiting firm could incur fees upon liquidation and transfer or inactivity fees if left with the current firm; (3) potential costs, such as differences in the pricing structure and fees imposed by the recruiting firm; and (4) differences in products and services between the current firm and the recruiting firm.

NASAA criticisms. Failing to require more specific dollar-figure disclosures shifts the burden to the retail customer to determine if conflicts of interest are created when a broker transitions to a new firm, said Beatty. Use of the term “educational communication” was also objectionable to NASAA because it fails to apprise the customer of the importance of the document.

NASAA encouraged FINRA to revise the proposal by: (1) requiring “specific, substantive” disclosure of financial incentives; (2) referring to the communication as a disclosure document; (3) requiring more detailed disclosure of the potential implications of a transfer; and (4) requiring delivery of the disclosures in advance of any attempt to solicit the transfer.

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