Finra has moved one step closer to finalizing a rule that would require brokers to tell clients how much they were paid to switch firms.
Wall Street's industry-funded regulator filed a final draft of the proposal late Monday with the Securities and Exchange Commission, where it will be subject to public comment and review by officials, according to a copy of the filing on Finra's website. Officials from the Financial Industry Regulatory Authority Inc. or the SEC were not available for comment.
If approved, the rule would require brokers paid more than $100,000 in incentive compensation — including upfront or backend bonuses, loans, accelerated payouts and transition assistance — to provide written notice to any customer asked to move with the broker within one year.
Finra's board approved the proposal last September as the regulator said it was looking to make sure that customers were aware of the potential conflicts of interest inherent in the recruiting process.
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“Finra believes this data will help Finra examiners better assess the adequacy of firm systems to monitor conflicts of interest and systems to detect and prevent underlying business conduct abuses potentially attributable to recruitment compensation incentives, and target exams where concerns appear,” according to Finra's filing with the SEC. “Further, Finra believes such data would inform any future rulemaking to require firms to manage conflicts arising from specific compensation arrangements.”
CLARITY FOR CUSTOMERS
In its filing, Finra also said the rule would help clarify to customers the possible costs to them of making a move with their broker.
“The former customers often may not be aware of the potential financial impacts to their assets that may result if they decide to transfer assets to a new firm, including, among other things, costs incurred to close an account with their current firm, transfer assets or open an account at the recruiting firm, and tax consequences if some assets are not portable and must be liquidated before transfer,” Finra said.
The final draft addresses the more than 65 comment letters the self-regulator received from its initial proposal, many of which were opposed to it.
A number of high profile industry names, such as Commonwealth Financial Network, Ameriprise Financial Inc. and the Financial Services Institute Inc., a lobbying group, had objected to the proposal, citing concerns over brokers' privacy and how brokers would make disclosures without misleading clients.
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The final draft represents a balance of those comment letters and has a good chance of being approved by the SEC because it only requires advisers to provide a range of compensation in $500,000 to $1 million bands, said Michael Roche, an attorney with Schuyler Roche & Crisham PC.
In its draft, Finra provided a sample form that advisers would fill out. Brokers would have to specify a range of total incentive compensation received in $500,000 to $1 million bands and check a box if there would be any cost to the customer to switch his or her account.
Mr. Roche said the rule would likely have a “chilling effect” on recruiting as advisers and firms determined how to handle the disclosures. Branch managers, who receive additional compensation for recruiting, may have the most to lose, he said.
Even if approved by the SEC, which oversees Finra, the proposal could face additional challenges from lawsuits, said Mr. Roche, who represents brokerage firms and supported the rule.
“It's a groundbreaking rule in the sense that the financial services industry is heavily regulated,” he said, “but I don't know of any other industry where employees or professionals are required to disclose compensation when they move.”
At least one broker said the rule would enhance protections for investors.
“It's just come to me how profoundly people in the financial services industry are motivated by money,” said Jean Maria Arrigo, an adviser with ING Financial Partners Inc. “When the person is moving your funds from one place to another place, what is the reason that they're doing it? They need to give me some reason for it besides that the other place is paying them more money.”