FINRA Concerned About Clients, Brokers Switching Firms

WASHINGTON — The Financial Industry Regulatory Authority (FINRA) wants clients to be notified if a broker/dealer attempted to lure them to their firm by hiring their current broker away from another firm.

The proposed “educational notice” would ask clients who have been approached about switching firms whether they have fully considered the potential cost of the switch or whether the switch would constitute a potential conflict of interest, among other points.

The recruiting firm would be required to provide the educational notice at the time the client was contacted about transferring assets to the firm, or shortly afterward, the FINRA proposal says.

The comment period on the proposal closes July 13.

This is the second time FINRA has proposed such a rule. It was first proposed in March 2014, but withdrawn for further consideration in June 2014 after receiving a strong reaction from industry. The commentators voiced concerns about the about the proposal’s competitive implications and operational aspects. Commentators also questioned the effectiveness of proposed compensation disclosures.

That proposal would have required brokers who were paid more than $100,000 to switch firms to disclose that information to the recruited customers. Substantial increases in compensation offered to the recruited broker also would have to be disclosed to FINRA by the new broker/dealer under the initial proposal.

The prior proposal also required the recruiting broker/dealer firm to disclose the basis for the additional compensation it is paying the new broker. For example, the firm would have to disclose whether the payment was based on the amount of assets the new broker had attracted to the firm, or the amount of new business the broker generated for his new firm.

In addition, the prior proposal would have required the broker/dealer who has recruited another broker’s client disclose to recruited client the potential costs of switching for an entire year following the date the registered representative began employment or associated with the recruiting firm.

FINRA said it remains committed to the education initiative because it is concerned that retail customers who have been lured to a new firm by their former broker “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.”

Under the new proposal, the educational document must suggest questions clients may want to ask to ask before they switch brokers. These include whether financial incentives the broker received may create a conflict of interest; whether the clients’ assets are transferrable directly to the recruiting firm; whether clients may incur costs to liquidate and move those assets or whether inactivity fees may be incurred if they have to leave the assets with their current firm.

Other issues that must be raised in the educational document include the potential costs related to transferring assets to the recruiting firm, including differences in the pricing structure and fees imposed between the client’s current firm and the recruiting firm, according to the new proposal.

“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,” the proposal says.

InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].

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InsuranceNewsNet Washington Bureau Chief Arthur D. Postal has covered regulatory and legislative issues for more than 30 years. He can be reached at [email protected].