FINRA has issued a regulatory notice (RN 16-18) regarding new Rule 2273, which requires member firms, when hiring a new broker from the competition, to send an “educational communication” to that broker’s customers if and when those customers move or seek to move their assets to the hiring firm. The new rule, which was recently approved by the SEC, is aimed at informing investors of the potential costs associated with moving their accounts from firm to firm when their brokers change jobs. Rule 2273 will go into effect on Nov. 11, 2016.
In the Regulatory Notice, FINRA noted that it is concerned that representatives who switch firms “often contact former customers and emphasize the benefits the former customers would experience by following the representative and transferring their assets to the firm that recruited the registered representative (‘recruiting firm’) and maintaining their relationship with the representative.” While it may be in the best interest of the broker representative to change firms, FINRA is concerned that customers “may not be aware of other important factors to consider in making a decision whether to transfer assets to the recruiting firm, including direct costs that may be incurred.” As a result, the educational communication required by the new rule “highlights key considerations in transferring assets to the recruiting firm, and the direct and indirect impacts of such a transfer on those assets.” In simple terms, FINRA believes that customers “would benefit from receiving a concise, plain-English document that highlights the potential implications of transferring assets.”
The “educational communication” prepared by FINRA is a two-page document and is available as Attachment B to Regulatory Notice 16-18. It may be delivered by the recruiting firm in paper or electronic form, but it must be sent (1) when the recruiting firm (directly or through a representative) contacts a former customer of that representative to transfer assets, or (2) when, absent individual contact, a former customer of the representative transfers assets to an account assigned to the representative at the recruiting firm.
The educational communication announces to customers that “You’re receiving this notice because your broker has changed firms. If you’re thinking about whether to follow your broker or stay with your current firm, it’s a good idea to examine key issues that will help you make an informed decision.” The questions posed by the communication are as follows:
- 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?
An original proposal by FINRA would have required disclosure of broker compensation to customers when a broker changes firms. That proposal is no longer part of the rule approved by the SEC and announced by FINRA. Regulatory Notice 16-18 (along with the text of Rule 2273 and the new “Educational Communication”) may be found here.