FINRA Sends Transition Bonus Disclosure Rule To SEC

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In a move designed to increase transparency between its member firms’ registered persons (“representatives”) and their former clients when they move from one firm to another, the Financial Industry Regulatory Authority ("FINRA") recently submitted FINRA Rule 2243 to the U.S. Securities Exchange Commission for approval. The rule would require representatives who have or will receive “upfront payments” or “potential future payments” exceeding $100,000 to disclose to former customers considering transferring their accounts, within ranges, incentives that the representative is receiving from the representative’s new firm and the basis for those incentives. The rule also requires that representatives disclose “costs, fees or product portability issues, including taxes if some assets must be liquidated prior to transfer, that will result if the former customer decides to transfer assets to the recruiting firm.” The disclosures would be oral if the first contact between the representative and the former customer is oral (to be followed in writing within 10 days) and in writing if the first contact between the representative and the former customer is in writing. In addition, the proposed rule would require members to report “information related to significant increases in total compensation over the representative’s prior year compensation that would be paid to the representative during the first year at the recruiting firm” to FINRA to allow FINRA to “assess the impact of these arrangements on a member’s and representative’s obligations to customers and detect potential sales practices abuses.” FINRA's overarching goal for the new disclosure requirements is to alert clients to any possible conflicts of interest that may arise from representatives changing firms in order to receive enhanced compensation.

Critics of FINRA's new rule point to two issues. First, the financial dealings between registered representatives and their employing firm are private. Second, the rule may result in chilling of recruitment. In addition, the rule is arguably unnecessary because there are already regulations in place aimed at preventing the exact behavior that the new rule is supposedly meant to stop. Supporters, on the other hand, argue that the new rule will increase transparency and communication between advisors and their clients – a “dialogue” – and will prevent conflicts of interest.

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Topics:  Compliance, Disclosure Requirements, FINRA, SEC, Transparency

Published In: Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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