FINRA Broker-Comp Rule Approved by SEC

Posted on April 8th, 2016 at 3:36 PM
FINRA Broker-Comp Rule Approved by SEC

From the Desk of Jim Eccleston at Eccleston Law LLC:

For three years FINRA has attempted to pass a rule that would make brokers’ employment transitions more transparent for clients. Last Wednesday FINRA passed the rule. The rule is designed to encourage investors to access important information relating to their accounts in a broker’s transfer to another firm.

The new rule requires that transferring brokers send an educational communication to investors if they are trying to persuade them to move to the new firm. FINRA will author document, and it will outline possible considerations for the clients such as whether the financial incentives at the new firm create a conflict of interest, whether any portion of the client’s assets cannot follow them to the new firm, and any potential fees or costs the client might face.

As the SEC views the rule, it will encourage customers to make inquiries to brokers which can help to increase communication between the two regarding potential implications of transferring assets. Moreover, the SEC feels that the increase of communication between the two will serve to benefit the customers when deciding whether or not to transfer.

An initial proposal required transitioning brokers to disclose details about their new compensation packages, but, after facing industry resistance, was modified to the current “educational communication” model. FINRA is confident that the new proposal is satisfactory to both investors and advisers. The fundamental concern being that the investors remain educated and the advisers receive consideration for the privacy of recruiting compensation that is often involved with transfer.

Industry professionals support the new rule, especially citing the balance it holds between both investors and advisers. Danny Sarch, president of Leitner Sarch Consultants, says, “It’s a sophisticated transaction and most clients don’t want to learn to that extent about it.” In his experience clients are less concerned with discovering the recruitment compensation package and more concerned with personal fees and restrictions.

A minor concern associated with the new rule may be that it accelerates the transfer of advisers who may be on the fence and hoping to get the jump on any new standards imposed by regulators. But Mindy Diamond, president and chief executive of Diamond Consultants, says that “for most quality advisers who have a deep relationship with clients, it will be a non-event.” She doesn’t expect that this should be a significant effect in the industry, at least for quality advisers. Mr. Sarch says that he typically advises brokers to reveal their recruiting package to clients in the first place. Through his experience in broker recruiting, previous firms will show the new compensation package to clients in an effort to deter clients from transferring anyway. 

The attorneys of Eccleston Law LLC represent investors and advisers nationwide in securities and employment matters. Our attorneys draw on a combined experience of nearly 65 years in delivering the highest quality legal services. If you are in need of legal services, contact us to schedule a one-on-one consultation today.


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