On December 23, 2015, FINRA filed a proposed amendment to its communication rules with the SEC, proposed Rule 2273.2 The proposal incorporates comments and feedback received from FINRA’s March 2014 proposal of Rule 2243, which sought to establish disclosure and reporting obligations with regard to member recruitment practices and account transfers. Rule 2243 proposed two reporting obligations: (1) a disclosure obligation applicable to the extent a firm attempts to induce a former customer of a representative to transfer the customer’s assets to the new firm; and (2) a disclosure obligation to FINRA when a firm provides a significant increase in compensation for representatives transferring to the firm. In contrast, proposed Rule 2273 revises this approach by removing the second disclosure obligation and focusing its attention on providing customers with disclosures about the consequences of transferring their assets.
Representatives who transfer between FINRA member firms often contact their former customers in an effort to induce them to transfer their assets to the representative’s new firm.3 FINRA is concerned that the former customer’s prior experience with the representative could overshadow other important questions that should be considered before the customer agrees to transfer assets to the representative’s new firm. (This concern, in part, arises because the representative may receive additional compensation from the new firm, which may present a conflict of interest.) Proposed Rule 2273 would require FINRA member firms to provide these former customers with an educational communication that highlights the key implications of transferring assets, such as:
- whether the representative is receiving a financial incentive and whether that creates a conflict of interest;
- the potential costs to the customer of leaving the current firm;
- the costs of transferring assets to the new firm, such as any differences in pricing structure and fees; and
- the differences in the products and services offered by the new firm compared to the customer’s current firm.
The educational communication is intended to prompt the customer to make further inquiries and gather information in order to be able to make an informed decision before any transfer.
Under the proposed rule, the educational communication would be required from the member firm when: (1) the firm, directly or through a representative, individually contacts a former customer of that representative to induce the customer to transfer assets to the firm; or (2) absent individual contact, a former customer of a representative transfers assets to an account assigned to the present representative at the firm. The proposed rule defines “former customer” as any customer who had a securities account assigned to the representative at the representative’s previous firm.4 The types of communications that would trigger the delivery requirement would be broad and include both oral and written communications. Group communications such as mass mailings, e-mails and automated phone messages would also trigger the delivery requirement. This delivery requirement would apply for a period of three months following the date that the representative begins employment or associates with the new firm. After three months, contact with former customers would no longer trigger the educational-communication delivery requirement.
Timing and Means of Delivery
The proposed rule requires that the educational communication be delivered at the time of first individualized contact with a former customer. If such contact is written, the educational communication must accompany such writing. In the case of electronic contact, a hyperlink to the educational communication would be permitted. If the contact is oral, then the educational communication must be sent to the former customer within three business days of the oral contact or along with any other documentation sent to the former customer related to the transfer of assets, whichever is earlier. The former customer also must be notified orally that an educational communication with important considerations for deciding whether to transfer assets to the firm will be provided to him or her.
When there is no individualized contact and a former customer chooses to transfer his or her assets to the new firm, the proposed rule requires that the educational communication be delivered to the former customer with the transfer approval documentation.
Format of the Educational Requirement
The format of the educational communication will be a uniform, FINRA-created form; members will not be allowed to use any alternative formats. This FINRA-created form, which was submitted as Exhibit 3 of the rule proposal, is a two-page document titled “Issues to consider when your broker changes firm,” and includes the following subsections:
- Could financial incentives create a conflict of interest for your broker?
- Can you transfer all your holdings to the new firm? What are the implications and costs if you can’t?
- What costs will you pay—both in the short term and ongoing—if you change firms?
- How do the products at the new firm compare with your current firm?
- What level of service will you have?
The form also includes FINRA’s logo, a brief description about FINRA and a hyperlink to FINRA’s website.
If the SEC approves the proposed rule, FINRA will announce the effective date of the rule no later than 60 days following SEC approval. The effective date of the proposed rule will be no later than 180 days following such SEC approval announcement. On February 4, 2016, the SEC review period was extended to March 29, 2016.