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.

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.”

0
Comments

What do you think?

View comments

Recommended for you

Does your pay stack up?

The Adviser Research Dashboard

Based on data collected through InvestmentNews' annual adviser research studies, this interactive, customizable tool allows you to view detailed data on compensation, staffing and financial performance practices from across the industry.

Learn more »

Upcoming Event

Jul 10

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

Events

How are financial services reacting to 'Times Up?'

There is much left to be done to reach full equality, say Estee Jimerson of Envestnt, but things are improving.

Latest news & opinion

Focus Financial IPO could be a sell signal for RIAs

The $100 million stock offering will fine-tune RIA valuations.

Ex-Edward Jones broker sues former firm, alleging racial bias

Complaint alleges the firm's policies limit African-Americans' 'income and advancement opportunities'

Piwowar defends SEC's best-interest rule

SEC commissioner says the Department of Labor rule set up an 'unworkable, impossible set of standards for people to comply with.'

RIA in a Box acquired by private equity firm Aquiline Capital

New owners plan more growth for the software service provider.

IBDs with the most female reps

Here are the 10 independent-broker dealers that have the most female reps.

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