New York Securities Lawyer Blog
On May 28, 2015, the Financial Industry Regulatory Authority (“FINRA”) released its second proposed rule designed to help investors understand what financial incentives their broker may have to transition between member firms and how those transitions could affect the customer’s investments. The complete FINRA release regarding the new rule may be found here. FINRA encouraged all interested parties to comment on the proposal no later than July 13, 2015.
Rule 2272 — “Educational Communication Related to Recruitment Practices and Account Transfers” (the “Proposed New Rule”) would require delivery of a FINRA created educational communication focusing on key considerations for customers contemplating transferring their assets, with their broker, to the recruiting firm. According to FINRA, a recruiting firm is any member firm that hires or associates with a registered representative who was previously associated with another member firm. FINRA created the Proposed New Rule because it was concerned that retail customers were not aware of important factors they should consider when making the decision to transfer assets to the transitioning registered representative’s new firm.
FINRA’s educational communication is intended to motivate customers towards making inquiries of the transitioning registered representative and the customer’s current firm, to the extent that the customer considers the content of the educational communication important to his or her decision. Specifically, FINRA’s educational communication highlights the potential implications of transferring assets to the recruiting firm and suggests questions the customer should ask questions 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 incur inactivity fees by leaving them with the current firm; 3) the potential costs related to transferring assets to the recruiting firm, including the difference in the pricing structure and fees imposed between the customer’s current firm and the recruiting firm; and 4) the differences in products and services between the customer’s current firm and the recruiting firm.
Additionally, the Proposed New Rule requires the educational communication to be provided at or shortly after the time of first contact with the customer regarding the transfer of assets to the recruiting firm. If that contact is in writing, the educational communication must accompany such written contact. However, if the written contact is made electronically, a hyperlink to the educational communication may be sufficient. When the contact is through oral communication, the educational communication must be delivered to the customer within the earlier of three business days or simultaneously when the recruiting firm makes contact with the customer regarding the transfer of that customer’s assets. Even if there is no contact by the registered representative, the Proposed New Rule would still require providing the educational communication to customers who, without any prompting from their broker, seek to transfer assets to the recruiting firm with the recruiting firm’s account transfer approval documentation. The Proposed New Rule requires that the educational communication must be provided to transferring customers for six months after the registered representative joins the recruiting firm. In fact, FINRA stated that the only time when the delivery requirement would not exist, would be when the transitioning registered representative contacts its former customer, who expressly refuses to follow the registered representative to the recruiting firm, but after more than six months, decides to transfer his or her assets to the recruiting firm.
Previously, FINRA considered adding an additional reporting obligation in situations where a transitioning registered representative would receive a significant increase in compensation. However, after commenters expressed concerns over the previous rule’s competitive and commercial implications, FINRA withdrew that proposal. FINRA will now consider the potential customer harm resulting from recruitment compensation as part of its broader conflicts management review.
Many unexpected legal issues can arise when registered representatives transition from one member firm to another. The proposed new rule will provide more information for customers, but could create more legal requirements for registered representatives and member firms. The attorneys at Lax & Neville LLP have represented hundreds of registered representatives in their transitions between firms. If you are a registered representative with questions regarding the implications from transitioning between firms, call our office today at (212) 696-1999 and schedule a consultation.