Finra releases revised broker compensation proposal

Brokerages would have to send an 'educational communication' to investors outlining questions they should ask their broker about compensation and other inducements for switching firms

May 27, 2015 @ 4:50 pm

By Mark Schoeff Jr.

Finra released a revised proposal Wednesday for a rule designed to help investors understand the financial incentives their brokers had for switching to a new firm.

Under the rule, brokerages would have to send an “educational communication” to investors working with a broker who is moving to their firm. The document customers receive would outline questions they should ask their broker about the compensation and other inducements the broker is getting to transfer to the new firm.

The questions would help investors determine whether the broker's financial incentives create a conflict of interest and whether investors would incur costs by following the broker to a new firm.

The broker-compensation proposal is a revised version of one the Financial Industry Regulatory Authority Inc. filed with the Securities and Exchange Commission in March 2014 but later withdrew amid industry resistance.

The original rule would have required brokers to disclose to investors recruiting incentives above $100,000 they received for switching to a new firm. It also would have required firms to report to Finra significant compensation increases for transferring brokers.

Critics said the “educational communication” watered down the original idea for compensation disclosures.

But “Finra believes the revised proposal is a more effective approach,” the regulator said in its proposal release. “[T]he educational communication allows for more context and explanation about financial incentives and is more likely to prompt a discussion with the transferring representative or current firm.”

In a meeting with reporters on the sidelines of the Finra annual conference in Washington Wednesday, Finra chairman and chief executive Richard Ketchum said that since the rule was withdrawn, Finra has conducted a cost-benefit analysis and consumer testing that improved the proposal.

“That has demonstrated … that disclosures are viewed as valuable by investors [in] focusing them on things they have not focused on before,” Mr. Ketchum said.

Finra is soliciting public comments on the proposal until July 13. The proposal is likely to be on the agenda of the July meeting of the Finra board.


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