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Regulation and Compliance > Federal Regulation > FINRA

FINRA Clarifies How BDs Should Handle Departing Rep Information

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Broker-dealers must “promptly and clearly” communicate a registered rep’s departure to clients — including the departing rep’s contact information — and provide “timely and complete” answers to clients’ queries about the departing rep, the Financial Industry Regulatory Authority states in a new Regulatory Notice.

However, FINRA’s notice is vague when it comes to whether broker-dealers must tell clients a parting rep was fired, a lawyers’ group says.

In Reg Notice 19-10, FINRA states that the broker-dealer self-regulator has “consistently sought to ensure that customers can make a timely and informed choice about where to maintain their assets” when their registered rep leaves a member firm.

FINRA states that it expects that when a rep leaves a firm, a BD should:

  • promptly and clearly communicate to affected customers how their accounts will continue to be serviced; and
  • provide customers with timely and complete answers, if known, when the customer asks questions about a departing registered rep.

The notice states that the broker-dealer should provide “reasonable contact information, such as phone number, email address or mailing address” as long as the rep has consented to the release of that information to clients.

Christine Lazaro, president of the Public Investors Arbitration Bar Association, a group of lawyers who represent investors in disputes with the securities industry, told ThinkAdvisor in a Monday email message that FINRA’s notice “contemplates investors getting accurate contact information when a broker changes firms, which may prevent firms from interfering with the investor’s choice of broker.”

However, Lazaro added, “it is important that investors also be told if a broker was fired for misconduct, so that the investor can make an informed decision about whether they want to continue to do business with the broker. Such disclosures should be a matter of policy and should not depend on the investor knowing what questions to ask.”

Lazaro stated that FINRA’s notice is “vague” on whether BDs must disclose that a departing rep was fired. The notice states, she said, “‘In addition, a member firm should communicate clearly, and without obfuscation, when asked questions by customers about the departing registered representative.’”

Explained Lazarao: “Presumably,  that would include reason for termination, but it doesn’t explicitly state that.”

A FINRA spokesperson told ThinkAdvisor on Monday that as part of the general process for filing the form U-5 when a rep leaves a firm, “the firm has to disclose the reason for termination (and note that termination in this sense does not necessarily mean ‘fired’).”

If discharged, permitted to resign, or other is checked on the Form U-5, the comment field will open and “those comments will be included on the individual’s BrokerCheck report,” the spokesperson said.

Registered reps frequently move between member firms and across financial firms under various regulatory jurisdictions, such as investment advisory and insurance companies, or leave the financial industry entirely, FINRA states in the notice, prompting customer questions on status of their accounts following the departure.

“FINRA recognizes that member firms’ different business models give rise to different approaches to managing the customer relationship, and that the expectations regarding a member firm’s handling of a departing registered representative will vary accordingly,” the notice states.

For instance, the departure of a registered rep who works closely with customers in a one-on-one relationship will likely be handled differently than the departure of a registered rep in a customer advisory center model or a group service model, FINRA explains.

While broker-dealers “have flexibility in reassigning customer accounts and communicating with customers about the reassignments, they should provide timely and complete answers, if known, to all customer questions resulting from a departing representative, so that customers may make informed decisions about their accounts,” according to the notice.

When a rep exits, customers should not experience an interruption in service, FINRA states, adding that decisions about the reassignment of customer accounts, if applicable, are typically made promptly following a rep’s departure.

Broker-dealers must also have policies and procedures reasonably designed to assure that the customers serviced by the departing rep are aware of how the customer’s account will be serviced once the rep leaves, “including how and to whom the customer may direct questions and trade instructions” and, “if and when assigned, the representative to whom the customer is now assigned at the member firm,” FINRA said.


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