March 6, 2013

FINRA’s Broker Bonus Rule Seen as ‘Done Deal’ With SIFMA OK

With SIFMA’s support, ‘a rule in this area seems to be a foregone conclusion,’ says securities lawyer Patrick Burns

More On Legal & Compliance

from The Advisor's Professional Library
  • Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
  • The Custody Rule and its Ramifications When an RIA takes custody of a client’s funds or securities, risk to that individual increases dramatically. Rule 206(4)-2 under the Investment Advisers Act (better known as the Custody Rule), was passed to protect clients from unscrupulous investors.

Brokers should only be required to disclose their recruitment compensation packages to clients when there is a potential conflict of interest, the Securities Industry and Financial Markets Association told FINRA Tuesday.

Patrick Burns

Securities lawyer Patrick Burns (right) told AdvisorOne Wednesday that with SIFMA's support, FINRA’s “proposal’s chances of becoming a new rule seem to be a done deal.”

Responding to the Financial Industry Regulatory Authority’s request for comment on its controversial proposal under Regulatory Notice 13-02 to require that brokers’ recruitment compensation be disclosed when they switch firms, SIFMA told FINRA in its March 5 comment letter that “enhanced compensation paid to a registered representative as a recruitment incentive, when a conflict of interest, should be the centerpiece of the proposed rule.”

FINRA’s proposed rule states that “customers would benefit from being told the material conflicts arising from a registered person being paid recruiting incentives to change firms.”

SIFMA says it believes that, at key moments in the investment process, “investors need clear, targeted and understandable disclosure on key factors” to make properly informed investment decisions. SIFMA says it “supports disclosure of information that is sufficient to inform an investor of the potential conflicts of interest when it may arise in connection with recruiting-related bonus payments.”

Ira Hammerman, SIFMA’s senior managing director and general counsel, added in the comment letter that “A tenet of a uniform fiduciary standard of care for both registered representatives and registered investment advisors is necessary and adequate disclosure. Investors should know up front about any potential conflicts of interest, and those disclosures should be in clear, plain English.”

The letter said SIFMA opposed requiring brokers to disclose recruitment packages while still associated with their prior firm, calling such a meaure "unworkable."

Out of all the comment letters regarding the proposed rule—which didn’t include any from the wirehouses—Burns told AdvisorOne that SIFMA’s “carries the most weight,” and that with SIFMA’s support, “a rule in this area seems to be a foregone conclusion.”

“The only thing to be worked out is the details of the rule,” he said.

Burns added that the absence of any comments from the wirehouses was “puzzling, unless you take the view they wanted this rule passed to save money on the massive costs they incur with recruitment deals.”

Burns also noted a recent interview in which Richard Ketchum, FINRA's CEO, said that after the comment period closed—which happened Tuesday—he expected FINRA would promptly request Securities and Exchange Commission approval of the plan.

------

Check out more stories on Broker Bonuses at AdvisorOne.

Reprints Discuss this story
This is where the comments go.