The Financial Industry Regulatory Authority is seeking comment to its proposal that advisors must disclose recruitment incentives to clients before switching firms.
Interested parties will have until March 5 to file their thoughts with the firm, according to the request.
The proposed rule is intended to help soften the potential conflict of interest created by up-front or back-end bonuses that could cause advisors to move for the wrong reasons or churn accounts to meet production goals, FINRA said.
FINRA seeks comment on a proposed rule that would require specific disclosure by the recruiting member firm of the financial incentives a representative receives as part of his or her relationship with the new firm, a spokesperson said in an emailed statement.
The self-governed regulator clarified a few portions of the proposal in the first draft. The recruiting member must provide the details of incentives over $50,000 orally or in writing at the first individualized contact by the recruiting member or registered person with the former customer after the registered person has terminated his or her association with the previous firm, the draft read.
That written portion must also be made apparent and give the details of the timing, amount and nature of the enhanced compensation.
A general disclosure in small type that a registered person received an unspecified bonus in connection with his or her employment at a new firm would not be sufficient under the proposal, FINRA wrote in the notice.
The text defined enhanced compensation to mean compensation paid in connection with the transfer of securities employment (or association) to the recruiting member other than the compensation normally paid by the recruiting member to its established registered persons.
That means that the mandatory would apply to signing bonuses, upfront or back-end bonuses, loans, accelerated payouts, transition assistance and similar arrangement, as long as those are above ordinary costs in the transition process, which FINRA bills at the $50,000 mark.
The regulator also specified some additional questions it was considering on possible expansions and modifications to the proposal including:
- Requiring written disclosure at first contact rather than allowing oral disclosure
- Applying to all customers recruited by the transferring registered person during the year
- Applying to new broker-dealer accounts assigned to the transferring broker opened by a former customer of that broker
- Requiring the discussion of that disclosure to take place while the registered person is still at the previous firm
- A requirement that the customer affirm the receipt of that disclosure at or before account opening at the new firm (FINRA is interested, in particular, in the potential for such a requirement to delay the account opening process in a manner that could disadvantage custoemrs, the firm noted)
- A different time period than one year after the move or a minimum higher or lower than $50,000
FINRA also specifically requests comments on the economic impact and the expected beneficial results of the proposed rule, the agency said in the request.
Comments are to be submitted either through email to email@example.com or by mail to Marcia Asquith at the Office of the Corporate Secretary.
The comments are then made public generally in the order they are received.
Before the rule could become effective, the FINRA Board of Governors would have to authorize it for filing with the Securities and Exchange Commission and then file it according to the Securities and Exchange Act of 1934.
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