FINRA Disclosure Proposal Heads To SEC

March 12, 2014 by Andrew Welsch

FINRA has filed a proposal with the SEC requiring advisors to disclose recruitment bonuses to their clients when switching firms, according to documents posted on FINRA’s website.

The proposed rule would require advisors changing firms to disclose the financial incentives they were given, if those incentives are $100,000 or more of either upfront recruitment bonuses or deferred bonuses, according to the documents. These bonuses include upfront or deferred cash, forgivable loans, loan-bonus arrangements, transition assistance, or equity awards. The recruited advisor would indicate to his or her clients how much the bonus was within a given set of ranges: $100,000 to $500,000; $500,001 to $1 million; $1 million to $2 million; $2 million to$5 million; and above $5 million.

In its filing with theSEC, FINRA said that starting the disclosure requirement at$100,000 made sense because the self-regulatory organization considered lesser amounts a weaker motivating factor to the advisor.

According to the documents, advisors would be required to disclose such information up to a year following the date that they begin employment at their new firm.The recruited advisor would also be required to inform their clients of any costs, fees, portability issues and taxes that will result if a client chooses to move assets to the advisor’s new firm.

In its filings, FINRA said that customers may not currently be receiving key information from recruiting firms and financial advisors when they are encouraged to transfer assets to their advisor’s new firm, and that customers may not be aware of the incentives an advisor has for switching firms.

“FINRA believes that former customers would benefit from information regarding recruitment compensation packages and such other considerations as costs, fees and portability issues that may impact their assets before they make a decision to transfer assets to a recruiting firm,” the authority said in its filings.

Under the proposed rule, transferring advisors would be required to inform their customers of their recruitment bonuses the first time they make contact following the switch, the documents revealed.

“The disclosures are intended to prompt a dialogue between the former customer and the representative or recruiting firm by providing a framework to consider the impact of a decision to transfer assets to a new firm,” FINRA said.

Yet some advisors and recruiters believe that the rule may slow movement between firms.Michael King, president ofMichael King Associates, a recruitment firm, believes that it will have an initial impact as advisors figure out the rule.

“Some advisors will be uncomfortable about their clients knowing how much their recruitment bonus is,” King says. “If the broker has done well for the client, then it will be less of an issue. But if the client has lost money, then it becomes more difficult.”

Advisors may choose to give the disclosure in writing or orally to be followed by a written disclosure within 10 days. According to the documents, the regulator will provide a template for disclosure forms, which includes a text box where advisors may add additional information they deem necessary.

“FINRA believes that allowing members and representatives an opportunity to provide context regarding the disclosures will alleviate concerns that the disclosures will be confusing or imply bad faith on the part of the representative,” the authority said.

The proposed rule would also require FINRA members to report to the regulator when a recruited advisor, who is receiving a bonus, begins employment at his or her new firm. The information will not be made public, but kept by FINRA in order to better monitor for conflicts of interest.

Originally Posted at InsuranceNewsNet on March 11, 2014 by Andrew Welsch.