Finra sends broker-compensation proposal to SEC for approval

The measure would require a broker who has transferred to a new firm to send an “educational communication” to clients

Dec 17, 2015 @ 2:25 pm

By Mark Schoeff Jr.

Finra has sent a proposal designed to illuminate broker-recruiting incentives to the Securities and Exchange Commission for approval.

The measure would require a broker who has transferred to a new firm to send an “educational communication” to clients he or she is trying to convince to move with him. That document, prepared by Finra, outlines questions clients should ask to understand how the broker's new position and pay arrangement affect them.

An exhibit in the Finra proposal outlines questions clients should ask: Could financial incentives create a conflict of interest for your broker? Can you transfer all your holdings to the new firm? What are the implications and costs if you can't? What costs will you pay — both in the short term and ongoing — if you change firms? How do the products at the new firm compare with your current firm? What level of service will you have?

Finra said retail investors it surveyed indicated the questions would help them make a decision on whether to follow their broker.

“Finra believes the proposed rule change will promote investor protection by highlighting important conflict and cost considerations of transferring assets and encouraging customers to make further inquiries to reach an informed decision about whether to transfer assets to the recruiting firm,” Finra stated in the rule change it filed with the SEC on Wednesday.

An industry recruiter said the questions could catalyze conversations brokers should willingly conduct.

“I don't think advisers should be scared of it,” said Danny Sarch, president of Leitner Sarch Consultants. “Everyone who is moving should be discussing the consequences with clients.”

Finra has been working on the broker-compensation issue since 2013. The proposal sent to the SEC has been changed significantly from the original version, which was more proactive on the broker side, requiring they disclose compensation details to clients when transferring between firms.

“They've softened it to address [industry] concerns,” Mr. Sarch said.

The original proposal was withdrawn in June 2014 amid strong industry criticism. The current proposal removes the compensation-disclosure requirement due to “privacy and operational concerns” expressed by critics, Finra said.

The industry is more comfortable with the proposal that's now before the SEC.

“Interactions [with Finra] have resulted in significant improvements to the proposal, including the use of educational communication provided to investors and requirements that are operationally feasible,” David Bellaire, executive vice president and general counsel at the Financial Services Institute, said in a statement. “While the current proposal isn't perfect, we look forward to the opportunity to share our comments with the SEC.”

Mr. Sarch advises his broker clients to be frank with their customers about recruiting incentives because the competition will talk about it anyway.

“The advisers at their legacy firm will use the fact that they took money to move against them,” Mr. Sarch said.

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