More On Legal & Compliancefrom The Advisor's Professional Library
- Nothing but the Best Execution Along with the many other fiduciary obligations owed by RIAs, firms owe a duty to seek best execution of clients transactions. If they fail to do, RIAs violate Section 206 of the Investment Advisers Act.
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
The Financial Industry Regulatory Authority announced Thursday that its Board of Governors approved a proposal requiring brokers to disclose recruitment compensation paid to them as an incentive to move to a new firm.
The regulator raised the threshold of payments that would need to be reported. The rule would apply to recruitment compensation — including signing bonuses, up-front or back-end bonuses, loans, accelerated payouts, and transition assistance — of $100,000 or more, and to future payments (trade-based or asset-based) contingent on performance criteria.
Earlier this year, FINRA proposed a $50,000 threshold. Jon Henschen (right) of the BD recruiting firm Henschen & Associates calls the change a "positive" development.
"This higher amount will make this a nonevent for many of the independent reps making moves since most of the independent packages fall under this benchmark," he says.
However, he adds, "for those independent broker-dealers that offer higher forgivable notes up to 40%, this [higher disclosure amount] will have a negative impact on recruiting efforts. But for the firms that stick to notes in the 10%-20% range, or for the majority of firms that only cover initial transition expenses, this will have little to no impact on daily recruiting efforts."
The proposal will be submitted to the Securities and Exchange Commission for review and approval. The SEC could then put the proposal out for public comment or approve it.
If ultimately approved, brokers would need to disclose their recruitment compensation to any customers that choose to follow them to their new firm for a full year after the broker's move.
“This proposal is about making sure the customer can make a fully informed decision to follow a broker to a new firm and understand the costs associated with transferring his or her account,” said FINRA CEO Richard Ketchum, in a statement. “This proposal reflects our commitment to transparency and investor protection.”
The proposal contains two components: a disclosure obligation and reporting to FINRA on "significant increases in total compensation" paid to newly recruited reps.
Firms would be required to disclose to their customers the compensation paid to the transferring representative in ranges. The first range would be $100,000 to $500,000; the next would be $500,000 to $1 million; increasingly larger bands would follow.
In addition, firms would be required to report to FINRA significant increases in total compensation paid to a newly recruited representative during the first year.
“The trigger for reporting would be an expected increase of 25% or $100,000 over the prior year's compensation, whichever is greater,” FINRA says. “This information will be used in risk-based examination targeting to look for sales abuses that may be motivated by the increased compensation and to inform any future rulemaking related to compensation incentives.”
Firms also would be required to disclose whether costs would accrue if a customer decides to transfer assets to the new firm and that certain assets may not be transferrable.
Henschen notes that "up to this point, there is no evidence that their has been any harm to clients from representatives taking transition money, so you have to wonder what motivates regulators to even push through such a measure." He adds: "With wirehouses offering transition packages up to 300% of trailing 12-month production, there is no question as to who is pulling the strings of regulators."
Check out Making Sense of the Nonsensical Broker Comp Rule on ThinkAdvisor.