More than a dozen broker-dealer and other concerned parties filed comments on a controversial Finra rule proposal requiring additional disclosure on recruitment compensation.
The Securities and Exchange Commission received a flood of comments April 17 — the last day of the 21-day comment period — from such major firms as LPL Financial, Stifel Nicolaus & Co. Inc. and Morgan Stanley Wealth Management. They detailed some of the biggest concerns broker-dealers and industry associations are having with the proposed regulation, including the fact that an adviser's new broker-dealer would be responsible for notifying clients whether they'll be subject to additional fees from the old firm if the clients' assets are moved. (See the comment letters.)
A quick breakdown of the Financial Industry Regulatory Authority Inc.'s proposed Rule 2243:
• Recruiting compensation of $100,000 and up, including signing, upfront or back-end bonuses, accelerated payouts and transition assistance, must be disclosed to clients who move with a broker to a new firm.
• The disclosure requirement would apply for one year after the date the representative starts his or her employment or associates with the broker-dealer.
• It's applicable if the broker-dealer reasonably expects the total compensation paid to the rep during the first year of association to result in an increase of the rep's prior year compensation by either 25% or $100,000.
Finra also believes that any action taken by a recruiting firm to persuade customers to transfer their assets to a broker's new firm should trigger the compensation disclosures.
Independent contractor broker-dealer firms were less than pleased with the proposed regulations, and pitched additional suggestions. Some of the most vocal pushback came from Commonwealth Financial Network's Andrew Daniels, managing principal of business development.
“We urge the commission to reject the proposed rule in its current form and direct Finra to redraft the proposal so it is narrowly tailored to address actual conflicts of interest, supported by actual empirical evidence, before resubmitting it to the commission,” Mr. Daniels wrote.
Chief among Commonwealth's concerns is the fact that “transition assistance” is considered a form of upfront payment, per the Finra regulation. It can take at least three months for reps who move from one firm to another to complete the process, and during that time they're not generating as much revenue. Reps generate large costs over that period, and transition assistance helps them foot the bill for expenses such as staff salaries and overhead, as well as the cost of acquiring new office space, Mr. Daniels wrote.
The Securities Industry and Financial Markets Association, meanwhile, noted in its letter that firms face significant challenges complying with the proposed rule. For instance, it's challenging to create a supervisory system that will meet the rule's requirement that written disclosures must be sent within 10 business days from oral contact with the client.
“There are potential challenges associated with pinpointing the exact date when a communication may morph into a solicitation to transfer assets,” wrote SIFMA general counsel Ira D. Hammerman.
He also noted that firms will have a hard time notifying clients whether their assets will be subject to potential costs or transferability restraints at a rep's old firm. The previous firm may have limits on sharing customer information with third parties, and the new broker-dealer may not have access to the customer information required under the proposal, Mr. Hammerman noted.
LPL Financial, meanwhile, pushed for greater specificity on a variety of details, including whether the disclosure is required if the former customer only worked with the rep on the investment advisory side of a broker-dealer. David P. Bergers, general counsel at the broker-dealer, also asked for clarification on how the disclosure requirements apply if recruitment pay is given to one member of a transferring group of reps and staff, rather than to each member of the team.
Meanwhile, wirehouses generally cheered the proposed regulations. Some third-party consultants have said that the firms, which pay hefty upfront payments to lure top-producing teams of brokers, have an incentive to tamp down those recruitment costs.
Representatives of Morgan Stanley Wealth Management, Wells Fargo Advisors, and UBS Financial Services Inc. submitted letters Thursday supporting the general thrust of the proposal and suggesting a variety of changes that the firms said could make implementation easier.
“UBS strongly supports the concept of an industrywide standard for disclosure of incentives relating to the recruitment of retail brokers,” wrote Brent H. Taylor, a lawyer for UBS. “However, UBS also believes that certain changes to the proposal would make it more effective and more efficient to administer.”
The wirehouses' suggestions for improvement are a hodgepodge — for instance, UBS and Wells Fargo said disclosures should be written rather than given verbally to clients, and Morgan Stanley said it would be impossible for firms to “conduct the analysis required to determine potential costs or analyze restraints on transferring assets to the new firm.”
Wells Fargo zeroed in on the perception that registered investment advisory firms could have a leg up in recruiting wirehouse teams because the Finra rule would not cover those firms, who are not regulated by Finra.
“A registered representative considering recruitment compensation offers from both a Finra member firm and a non-member RIA may avoid detailed disclosure by associating with the RIA,” wrote Robert J. McCarthy, director of regulatory policy for Wells Fargo Advisors. “The proposed rule may therefore incentivize representatives who are considering leaving their current firm to favor employment with RIAs, which are not subject to Finra oversight.”
—Trevor Hunnicutt contributed to this article