On March 7, 2014, FINRA filed a proposed rule change with the SEC. If adopted, this new rule would require financial advisors who receive recruitment compensation to provide transferring clients a disclosure form with the amount of compensation they received or will receive for changing firms.
In a nutshell, this would mean that advisors who receive recruitment compensation would have to give their clients a disclosure form listing the amount of compensation they have been paid upfront by the broker-dealer and/or the aggregated potential future payments they will receive from the broker-dealer as part of the recruitment arrangement.
The disclosure form would also describe whether the client would incur costs to transfer their assets to the advisor’s new broker-dealer and whether some of those assets could not be transferred, which may cause the client to incur costs and taxes to liquidate and transfer or incur inactivity fees to leave these assets at the current firm.
The rule filing follows in the footsteps of FINRA Regulatory Notice 13-02, released in January of last year. FSI raised several concerns with the original proposal, including the arbitrary compensation threshold, the lack of discrimination with respect to different types of recruitment compensation paid to advisors, violations of financial advisors privacy, lack of cost-benefit analysis in the proposed rule, and several other issues.
While we support efforts by regulators that aim to increase transparency and address conflicts of interest, several aspects of this rule present challenges that FINRA should consider. The rule is simultaneously overbroad and under-inclusive because it would require the disclosure of certain types of recruitment compensation arrangements that do not raise conflicts of interest, such as transition assistance, while not including retention bonuses in the disclosure requirements. In addition, FINRA has not released the details of its cost-benefit analysis of this rule. This is an important omission because we believe the proposal may have a negative effect on competition and a disproportionate effect on smaller firms. Financial advisors may have concerns with regard to their financial privacy due to this rule as well.
While we have significant concerns with many of the proposal’s requirements, other aspects of the rule, including disclosure regarding whether a transferring client will incur fees and other costs, are welcome and will assist clients in making more informed investment decisions.
What are your thoughts on this? Feel free to share them in the comments section!