The Financial Industry Regulatory Authority has released Q&A guidance on its rule requiring member broker-dealers to provide an educational communication in connection with member recruitment practices and account transfers. The rule takes effect Nov. 11.
FINRA filed late in 2015 for Securities and Exchange Commission approval its Rule 2273, and the SEC approved the rule in March.
FINRA stated in the rule proposal that it believes that “former customers would benefit from receiving a concise, plain-English document that highlights the potential implications of transferring assets.”
The educational communication, according to FINRA, “is intended to encourage former customers to make further inquiries of the transferring representative (and, if necessary, the customer’s current firm), to the extent that the customer considers the information important to his or her decision making.”
The Q&A guidance covers such areas as format of educational communication, “individualized contact,” delivery requirements and who qualifies as a former customer.
Some examples of the questions and FINRA’s answers follow:
Question: Does Rule 2273 apply if the registered representative was hired by or associated with the recruiting firm prior to the effective date of the rule?
Answer: No. FINRA interprets Rule 2273 to apply if the registered rep is hired by or associates with the recruiting firm on or after the effective date of the rule. Pursuant to Rule 2273(b)(3), delivery of the communication is required for a period of three months following the date the registered rep begins employment or associates with the recruiting firm.
For registered reps who are hired or associate with a member firm prior to the effective date, the requirements of Rule 2273 will not be triggered if a former customer is individually contacted by the recruiting firm or registered rep or, absent individualized contact, transfers his or her assets to the recruiting firm after the effective date.
Question: Does the term “former customer” include a customer who held only a non-securities account at the registered representative’s previous firm?
Answer: No. The term “former customer” includes only those customers who held a securities account assigned to a registered rep at the registered rep’s previous firm. A customer who held only a non-securities account (e.g., a bank account) at the registered rep’s previous firm would not be considered a former customer for purposes of Rule 2273. Furthermore, the term “former customer” would not include a customer who transferred a securities account from the transferring representative’s previous firm to the recruiting firm but whose account was assigned to another registered rep at the previous firm.
Question: Does Rule 2273 allow a member firm to include the educational communication with another written communication (e.g., a letter) announcing that a registered rep was hired by or associated with the member firm?
Answer: Yes. Pursuant to Rule 2273(b)(1)(A), if the first individualized contact with a former customer by the registered rep or member firm is in writing, the educational communication must accompany the written communication.
FINRA would consider a written communication announcing that a registered rep was hired by or associated with the member firm to be individualized contact with a former customer. A member firm therefore could satisfy the rule’s requirement by choosing to send some or all of a registered rep’s former customers such an announcement letter and include with it the educational communication.
— Check out The Fiduciary Rule’s Effect on Recruiting on ThinkAdvisor.