The SEC has just ended its comment period for a proposed rule requiring disclosure and reporting of recruitment deals. While several wirehouse and large independent broker-dealers have mixed views on the potential regulation — and suggest major changes — a group of about 150 independent advisors has given the proposal, referred to as Rule 2243, a big thumbs-down.
A key objection of the advisors is that the rule would “stifle competition and threaten succession planning,” according to a letter that was sent separately by 150 advisors and entities to the SEC before Friday.
“If this rule is enacted as proposed, it will have a chilling effect on financial advisors moving to new broker-dealer firms,” they said. “This requirement will cause financial advisors to remain at a firm so as to avoid professional embarrassment and an invasion of privacy, even if leaving would serve their clients’ interests.”
The SEC has until mid-May to act on FINRA’s proposal, though it can chose to extend this period to the end of June or later. The SEC must approve Rule 2243, reject it or hold proceedings regarding the rule’s potential rejection.
As the independent advisors stated in their letter, Rule 2243 would “have the unintended consequence of threatening advisors’ succession planning in instances where a firm provides transition assistance to an advisor taking over the clients of a retiring colleague. This will have a severely negative impact on clients who have advisors nearing retirement.”
The advisors sending the common letter to the SEC, like many broker-dealers writing to the regulatory group, generally support moves to protect investors, such as requiring disclosure of material conflicts of interest.
However, they say, FINRA’s proposed rule could easily “create problems that will outweigh its benefits and will give investors the mistaken assumption that a material conflict of interest exists in every situation where an advisor accepts recruitment compensation.”
As several broker-dealers noted in their own separate letters to the SEC, many of which were received on Thursday, the requirement that upfront or future payments of more than $100,000 be disclosed, fails to consider the common industry practice of reimbursing advisors for the transition costs of moving from one broker-dealer to another.
“While I may receive a payout for switching firms, the money does not go into my pocket as income, but rather goes toward supporting my business and my clients,” the advisors noted. “While the proposed rule language would allow advisors to subtract direct costs from the calculation of compensation, the language must be clearer with respect to lost revenue and the indirect costs incurred by advisors during a transition.”
Another complaint of the independent reps concerns privacy. Many reps live in the same community as their clients. Thus, they say, FINRA’s recruitment-compensation disclosure rule “would force me to disclose part of my income to them, putting me and my clients into a personally and professionally uncomfortable and unnecessary position.”
Rather than sharing the compensation details with clients, the advisors would prefer to give this information to regulators instead. “This way FINRA could examine potential conflicts of interest and enhance investor protection without causing me potential professional and personal embarrassment,” they explained.
Overall, the reps argue that Rule 2243 is “overly broad” and “will have a negative impact on clients without providing them with enhanced investor protections.” They ask FINRA — and by extension the SEC — to reject it.