More On Legal & Compliancefrom The Advisor's Professional Library
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
FINRA on Friday fulfilled its promise to seek comments on its controversial plan to require brokers to disclose their pay packages.
Comments on the proposed rule, Regulatory Notice 13-02, which requires disclosure of conflicts relating to recruitment compensation practices, must be sent to FINRA by March 5.
FINRA announced Nov. 29 that its board would be mulling such a rule at its Dec. 6 meeting.
FINRA’s proposed rule would require member firms to specifically disclose the financial incentives they give to the representatives they recruit. The recruiting firm would be required to provide the disclosure before the rep's former customers transfer their accounts to the new firm.
Securities lawyer Patrick Burns says that a “number of FINRA member firms, namely wirehouses, offer significant financial incentives to recruit registered representatives to join their firms, yet these compensation arrangements are not disclosed to customers when they are asked to transfer their accounts to a representative’s new firm.”
The proposed rule states that “FINRA believes that customers would benefit from being told the material conflicts arising from a registered person being paid recruiting incentives to change firms.”
However, Burns notes that FINRA’s Regulatory Notice 13-02 “makes no mention” of broker retention compensation practices. “It is unclear whether these practices would be considered separately pursuant to a different proposed rule at a later date,” he says.
Burns goes on to say that “many of the concerns about front-end recruitment bonuses mentioned in Regulatory Notice 13-02, such as forgivable loans and production-based bonuses, also apply to retention bonuses.”
But FINRA’s “efforts in requiring more disclosure by brokers about their compensation practices is a move toward providing more information to clients about fees they ultimately pay and conflicts of interest they should be aware of.”
What’s more, FINRA proposing a rule on recruitment compensation practices “appears to be a move towards treating brokers as fiduciaries,” Burns notes. “Many in the brokerage industry have been calling for a common fiduciary standard for brokers and advisors for years. This proposed rule is a step in that direction.”
Comments can be submitted by emailing them to email@example.com or mailing them to Marcia E. Asquith, Office of the Corporate Secretary, FINRA 1735 K Street, NW Washington, DC 20006-1506.