Wednesday, May 18, 2016

SEC okays FINRA rule for brokers bringing customers to new firm

By Anne Sherry, J.D.

The SEC approved FINRA's adoption of a rule requiring brokers who move to a new firm to provide a communication to customers they want to take with them. The two-page document is a standardized list of issues and questions for the customer to consider, rather than the dollar-figure disclosure NASAA had requested. The recruiting firm must provide the communication whenever a broker's former customer (not including institutional accounts) transfers assets to an account that will be assigned to the broker, or whenever the firm contacts the broker's former customer to transfer assets.

Timing of communication. The disclosure, appended to FINRA's regulatory notice, will be required at the time of first individualized contact with a former customer regarding an asset transfer. If this first contact is oral, the firm or broker must notify the former customer at that time that the written communication will follow within three business days. However, if the customer expressly rebukes the firm's solicitation, the firm does not need to provide the communication unless the customer has a change of heart within three months after the broker associates with the firm.

The rule also applies when the former customer transfers assets to an account that is, or will be, assigned to the broker—even if the broker or firm has not made individualized contact. When it is the customer that makes first contact in this way, the communication must accompany the account transfer approval documentation.

Content of communication. The communication suggests customers ask about potential conflicts of interest, the implications and costs associated with liquidating and transferring assets (or leaving some assets where they are), how the product offerings at the two firms compare, and what level of service the new firm will provide.

Standardized vs. dollar-figure disclosure. The rule was adopted over NASAA's criticism. The regulators' group had advocated for a disclosure of the actual compensation that the representative received or would receive in connection with the transfer and whether the compensation was asset- or production-based. The first proposal, which did call for dollar-figure disclosure, was scrapped after commenters complained about its effects on operations and competition.

FINRA Rule 2273 becomes effective November 11, 2016.

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