Finra's broker bonus disclosure rule pulled

Agency withdraws a controversial proposal that would have required brokers to tell clients about recruitment incentives

Jun 23, 2014 @ 11:47 am

By Mason Braswell

finra, disclosure, broker, bonus, rule, proposal, sec
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Finra has withdrawn a controversial proposal that would have required brokers to tell clients about recruitment incentives they receive in excess of $100,000.

The Financial Industry Regulatory Authority Inc. filed a notice late Friday with the Securities and Exchange Commission that it was pulling Rule 2243, which would have forced advisers to disclose signing bonuses when they changed firms and to tell clients about any fees they would incur as a result of the move.

Brokers would have had to make the disclosure orally at their first point of contact and then provide written notice within 10 days.

(More: Read the latest on Finra's operating loss from its annual report.)

Finra plans to file another version of the proposal later this year, according to a statement provided by Finra spokesman George Smaragdis.

“Finra continues to believe that recruitment disclosures remain an important investor protection issue and plans to develop a revised proposal and file it with the commission later in the year,” he wrote in an emailed statement.

Mr. Smaragdis said that the regulator needed more time to address the feedback it had received. The proposal drew 184 comment letters since the agency originally sent the 350-page proposal to the SEC for approval in March, he said.

The withdrawal came as a surprise to industry observers. Many expected that because it had made it to the SEC, a rule was imminent.

Some firms had even been encouraging their managers to use the threat of the rule to push people to make a move this summer.


“This comes as a bit of a surprise for sure,” said Michael Roche, an attorney representing brokerage firms with Schuyler Roche & Crisham. “I just thought some sort of rule was ultimately going to be promulgated, even if not necessarily in the proposed language. Now it's back to the drawing board.”

Finra's statement implied that any new version would maintain the tenets of the original proposal.

“Finra continues to believe that former customers would benefit from knowing: that financial incentives may have motivated their representative to change firms; the costs associated with transferring assets to a new firm; and whether moving their assets to the recruiting firm will impact their holdings,” Mr. Smaragdis said.

Some speculated that Finra was withdrawing the motion because of the concerns raised in public comment letters filed with the SEC. Even those who said they supported the plan in theory raised specific concerns with how it would be implemented.

In comment letters, brokerages said they were concerned with whether customers would misunderstand the disclosures or be disinclined to follow their broker to the new firm. They were also concerned with how to enforce the rule or whether telling clients how much they were paid to move could violate non-solicitation agreements with the prior firm.

“There were a good number of comments received and there was a lot of input,” said Joe Dougherty, an attorney with Buchanan Ingersoll & Rooney who represents brokerages in employment disputes. “My sense is that all those comments needed to be digested, and perhaps the rule will get refined and reissued.”

The Financial Services Institute, a trade group of independent broker-dealers and advisers, supported the withdrawal, saying it would give Finra time to do a more thorough cost-benefit analysis.

“I think it's a good thing that it was withdrawn,” said Robin Traxler, vice president of regulatory affairs at FSI, in an interview. “In addition to the cost-benefit analysis discussion, we also said in our comment letter that the rule could use more clarity.”

(Related: Fire heats up under Finra's Brokercheck link proposal)

Finra has pulled and retooled proposals in other instances. A proposal that would allow arbitrators to make mid-case referrals, for example, has been withdrawn from the SEC more than once since 2010 and is now sitting before the SEC once again.

Industry recruiter Mindy Diamond of Diamond Consultants said that the proposal would likely have been a “non-issue” as advisers would have been able to find ways of disclosing the information to clients without disrupting their transition.

“I don't think you're going to hear cheering in the streets,” she said. “I'd like to think that [Finra] realized that just because an adviser is paid a significant sum of money to move firms does not translate into the fact that he is a bad adviser.”


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