SEC approves Finra broker-compensation rule

The rule requires transferring brokers to send an “educational communication” to clients they are trying to convince to make the move with them

Mar 24, 2016 @ 2:12 pm

By Mark Schoeff Jr.

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The Securities and Exchange Commission has approved a Finra rule designed to encourage investors to ask their brokers about incentives they received to change firms.

The compensation rule requires transferring brokers to send an “educational communication” to clients they are trying to convince to make the move with them. That document, written by the Financial Industry Regulatory Authority Inc., will outline things the client should consider, such as whether financial incentives create a conflict of interest for the broker, whether some of their assets can't follow them and the potential costs involved.

The document also will contain questions investors should ask their brokers. If the client moves assets without talking to the broker, the communication must be included with account-transfer material.

“The proposed educational communication may encourage former customers to make inquiries of their representatives, which could increase communication between customers and representatives about the potential implications of transferring assets,” the SEC states in its March 23 approval order. “The commission believes that the increase in information and communication about the potential implications of transferring assets will benefit customers when deciding whether to transfer assets.”

The action ends a nearly three-year journey for the rule, which was sent to the SEC in December.

The initial proposal required brokers to provide their clients with details about their compensation packages. After industry resistance, the disclosure was revised to “educational communication.”

“While educating former customers about important considerations to make an informed decision whether to transfer assets to the recruiting firm, Finra believes the proposed rule eliminates or reduces the privacy and operational concerns regarding the previous proposal (e.g., by removing the requirement to disclose to former customers the magnitude of recruitment compensation paid to a transferring representative),” the SEC order states.

The revised rule is a less-stringent requirement for brokers.

“It's broker disclosure light,” said Mindy Diamond, president and chief executive of Diamond Consultants, a broker recruiting firm.

Another broker recruiter, Danny Sarch, president of Leitner Sarch Consultants, said the revised rule strikes the right balance when it comes to compensation incentives.

“It's a sophisticated transaction, and most clients don't want to learn to that extent about it,” Mr. Sarch said. The educational communication “will begin a dialogue so that a client who wants to know more will ask.”

The implementation date of the rule will be announced in a forthcoming notice about SEC approval of the rule, according to a Finra spokeswoman.

The SEC's OK might accelerate the decision timeline for some brokers who are on the fence about changing firms, Ms. Diamond said. But she doesn't expect it to cause too much consternation.

“For most quality advisers who have a deep relationship with clients, it will be a non-event,” she said.

Mr. Sarch has been counseling brokers for years to reveal their recruiting package to their clients, because the firms that they're leaving will use it against them anyway.

He added that transferring brokers are usually the most talented and compliant ones.

“Finra and other regulators have never been able to prove that advisers who have departed are a bigger compliance risk than advisers who don't move,” Mr. Sarch said. “If they're looking for bad guys, they're looking in the wrong place.”


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