The Financial Industry Regulatory Authority took another step forward in mid-March to require brokers to disclose recruitment compensation paid to them as an incentive to move to a new firm by sending the plan to the Securities and Exchange Commission for approval.
The regulator raised the threshold of payments that would need to be reported. Rule 2243, approved by FINRA’s board last September, 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.
- The Few and the Proud: Chief Compliance Officers (CCOs) make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
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Earlier last year, FINRA proposed a $50,000 threshold.
FINRA states in its proposal sent to the SEC that the rule change would “provide former customers of a representative with a more complete picture of the factors involved in a decision to transfer assets to a recruiting firm. FINRA believes that former customers would benefit from information regarding recruitment compensation packages and such other considerations as costs, fees and portability issues that may impact their assets before they make a decision to transfer assets to a recruiting firm.”
Jon Henschen of the BD recruiting firm Henschen & Associates told ThinkAdvisor in a previous interview that the change is a “positive” development.
However, he said that “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.”
But “for those independent broker-dealers that offer higher forgivable notes up to 40 percent, this [higher disclosure amount] will have a negative impact on recruiting efforts. But for the firms that stick to notes in the 10 percent - 20 percent range, or for the majority of firms that only cover initial transition expenses, this will have little to no impact on daily recruiting efforts.”
Joshua Horn, with the law firm Fox Rothchild, agrees in a recent blog post that FINRA’s rule, if approved, “will have a chilling effect on the movement of registered representatives.” Horn also challenges the rationale for FINRA’s proposal. “FINRA’s rationale for the rule is that it would clarify potential costs that customers incur when they move their accounts from one member firm to another,” Horn writes. “FINRA cited, for example, costs to close the account at the first firm, as well as tax consequences associated with the liquidation of investments that are not transferable.”
However, he says, “This rationale does not make much sense when considered more fully. These so called costs should be disclosed to a customer who closes an account regardless of the reason. Tying it to compensation paid to a broker who intentionally fails to advise her client about costs rings a bit hollow for a justification.”