Finra backs incentive comp disclosure rule

Rule goes to Securities and Exchange Commission for consideration

Sep 19, 2013 @ 3:35 pm

By Mark Schoeff Jr.

The board of the Financial Industry Regulatory Authority Inc. has approved a proposal that would require brokers to disclose the amount of incentive pay they received to switch firms.

Recruiting compensation of $100,000 or more — including signing, upfront or back-end bonuses, loans, accelerated payouts and transition assistance — would have to be disclosed to any customer who followed a broker to a new firm within one year of his or her transition. The broker also would have to disclose future compensation based on performance.

The reporting threshold was increased from the $50,000 level in the original Finra proposal released this year.

Firms would have to disclose to customers compensation paid to new recruits in the ranges of $100,000 to $500,000, $500,000 to $1 million and higher. They also would have to report to Finra any significant increases in a new hire's compensation over his or her first year if it amounted to 25% or $100,000, whichever were higher. Finra intends to use the information to target examinations of sales abuses.

In addition, firms would have to tell customers following a broker whether they will incur costs for moving their assets and whether some of them can't be transferred.

The rule now goes to the Securities and Exchange Commission for review and approval. The agency may make revisions and put the proposal out for comment.

Finra officials say the rule is designed to highlight potential conflicts of interest for hotshot brokers who move from firm to firm.

“This proposal is about making sure the customer can make a fully informed decision to follow a broker to a new firm and understand the cost associated with transferring his or her account,” Finra chief executive Rick Ketchum said in a statement. “This proposal reflects our commitment to transparency and investor protection.”

The original proposal generated about 65 comment letters and a steady stream of criticism from independent-broker dealers and financial advisers. Wirehouse firms generally support the rule while critics said the rule should have included retention bonuses. The proposal does not address that issue.

The Financial Services Institute Inc., which represents independent broker-dealers and financial advisers, said it is pleased that the reporting threshold was raised to $100,000 from $50,000 but it is waiting for more details before deciding whether to support the rule.

“We look forward to closely examining Finra's proposal to see if it achieves the goal of providing investors with meaningful disclosure of material conflicts of interest without unnecessarily compromising financial advisers' privacy,” said David Bellaire, FSI executive vice president and general counsel.

The higher limit for reporting gives the independent sector a break.

“Most of the transition packages in the independent channel fall under the $100,000 benchmark,” said Jon Henschen, president of Henschen & Associates LLC, a broker recruiting firm. “They won't have any disclosure requirements.”

While the SEC mulls over the rule, its advance may spur some brokers to make career decisions.

“In the short-term, it may accelerate the moves of advisers who are on the fence,” said Mindy Diamond, president of Diamond Consultants LLC, a search and consulting firm.

Advisers with high-net-worth clients aren't too concerned about the rule, according to Ms. Diamond, who said smaller advisers who generate about $1 million in revenue annually and whose clients have about $500,000 in assets might be put off by the new disclosures.

“It's tough to tell those clients you're being paid $3 million to switch firms,” Ms. Diamond said.

Wirehouses are backing the rule because they're getting tired of paying huge recruiting incentives and are looking to Finra for help, Mr. Henschen asserted.

“They're the obvious motivators in pushing this through,” Mr. Henschen said. “Crony capitalism lives.”

The regulator weighed input from the comment letters and proposed a rule that achieves “a great balance,” John “Jack” Brennan, the Finra board's lead governor and chairman emeritus of the Vanguard Group Inc., said in a video on Finra's website.

“In many ways, it's the best of the Finra rulemaking process,” Mr. Brennan said.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

May 02

Conference

Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

INTV

Why some retirement plan advisers think Fidelity is invading their turf

InvestmentNews editor Frederick P. Gabriel Jr. and reporter Greg Iacurci talk about this week's cover story that looks at whether Fidelity Investments is stepping on the toes of retirement plan advisers.

Latest news & opinion

Speculation mounts on whether others will follow UBS' latest move to prevent brokers from leaving

UBS brokers must sign a 12-month non-solicit agreement if they want to get their 2017 bonuses.

8 apps advisers love for getting stuff done

Smartphone apps that advisers are using in 2018 to run their business more efficiently.

Galvin's DOL fiduciary rule enforcement triggers industry plea for court decision

Plaintiffs warned the Fifth Circuit that Massachusetts' move against Scottrade signaled that the partially implemented regulation can raise costs for financial firms.

Social Security underpaid 82% of dually entitled widows and widowers

Agency failed to tell survivors that they could switch to a higher retirement benefit later.

Is Fidelity competing with retirement plan advisers?

As the Boston-based mutual fund giant expands the products and services it brings to the retirement market, some financial advisers say the firm is encroaching on their turf.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print