Consumer and industry advocates are criticizing FINRA over its alternative to a proposal that would have required recruiting firms to disclose advisor compensation incentives to clients when moving between brokerages.
The new proposal requires firms to educate clients on the issues that would arise from their broker switching firms, including the costs that may arise, non-transferrable investments and financial incentives the broker may receive that could be based on client asset transfers, or product sales at the new firm, said FINRA chairman and CEO Richard Ketchum in a recorded statement on the regulators website.
A previous proposal would have had recruiting firms disclosing advisor signing bonuses, and informing advisor clients about asset transfer costs if they went with them to the new firm. The proposal was sent to the SEC, but taken back in June. It received over 180 comments during the approval process, and regulators could not respond to all in the time allotted for review by the SEC.
FINRA executives acknowledged the response generated by the original proposal as reason why the change was made.
This is another good example of how the rule-making comment process works, noted FINRA lead governor Jack Brennan in recorded comments released on the regulators website. This revised approach allows FINRA to achieve its investor protection mandate, while addressing most of the operational concerns that were raised by commenters.
In the same video, Ketchum described the move as a different approach, focused directly on the types of questions customers should be directly asking before making a decision whether or not to move their accounts.
He characterized the regulators new proposal as an important step forward to help investors understand key issues to consider in following a broker to a new firm.
Some industry organizations signaled their support for the proposal change.
SIFMA supports FINRAs goal of fostering investor protection by empowering investors to make educated and informed decisions about following a representative to a new firm, Ira Hammerman, Executive Vice President and General Counsel for SIFMA, commented in a statement. Investors should know up front about significant potential conflicts of interest, and those communications should be in clear, plain English.
However, other client and industry advocates wondered aloud about the worth of the new proposal.
It seems as if this is a move away from more disclosure and a clear commitment to opaqueness around fees and expenses that investors should know about, and its very unfortunate, says Knut Rostad, president of the Institute for the Fiduciary Standard.
Many clients from very small accounts to large accounts do not know what they pay for the services they get, and industry ought to be ashamed of it.
Barbara Roper, director of investor protection at the Consumer Federation of America, says the new proposal is misguided. Im not sure that disclosure of dollar amounts of those incentives was the most key information investors needed to receive, she says.
Marc Menchel, former general counsel and executive vice president at FINRA, argues that the regulator should drop the proposal entirely.
There are rules against churning an account, soliciting unsuitable securities, and other safeguards in place, Menchel says. FINRA is trying to plug every possible hole that might be adverse to investors. But there is always inherent conflict between the person youve hired because they are getting paid.
"Im dubious that further disclosure rules will help. People either follow the rules or not. But to tell the world your employment situation? Im not sure thats right.
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