FINRA came out with a slightly weird Regulatory Notice last week. In a succinct document, barely over two pages, FINRA addressed something that may, or may not, actually be of concern to anyone. In short, Regulatory Notice 19-10 states FINRA’s position on what a broker-dealer is supposed to tell the customers of a registered representative who “departs” the firm…at least those customers who bother to ask. According to FINRA, the reason it has chosen to supply this guidance is “to ensure that customers can make a timely and informed choice about where to maintain their assets when their registered representative” leaves (for whatever reason). But, as I suggested at the outset, I am not entirely certain what prompted the Notice. Is it that BDs aren’t telling customers that their assigned rep have left (so they can try to keep the customer)? That they aren’t telling the truth about why they left (to avoid a possible defamation suit)? That they are taking steps to prevent customers from communicating with their “departed” former reps (again, for competitive reasons, presumably)?

Regardless, it is now clear what is supposed to happen when a rep leaves. And it boils down to just a few things.

First, firms need to have “policies and procedures reasonably designed to assure that the customers serviced by that registered representative are aware of how the customers’ account will be serviced at the member firm.” That means that when a rep leaves, the firm “should promptly and clearly communicate to affected customers how their accounts will continue to be serviced.” According to FINRA, this means explaining to customers “how and to whom” they “may direct questions and trade instructions following the representative’s departure.” It also means informing customers to whom their accounts are being assigned. That seems pretty self-evident, but, apparently, this has been an issue for some customers.

Second, and perhaps more significant, firms “should communicate clearly, and without obfuscation, when asked questions by customers about the departing registered representative.” Let’s unpack this.

My initial thought is, how interesting that, based on how this was phrased, FINRA only requires this sort of candid conversation in response to questions posed by customers. In other words, it appears that firms need not volunteer the reasons why a rep has left; but, if a customer is curious enough to ask, the firm then has to provide the sordid details, “[c]onsistent with privacy and other legal requirements,” of course. Like when selling a house. The seller doesn’t have to volunteer most hidden defects, but, if the prospective buyer asks, then the seller has the legal obligation to provide an honest and complete answer. I suppose this means that in cases of terminations for cause, mere disclosure on Form U-5 won’t suffice. I cannot imagine that firms are thrilled at the prospect of having conversations like this, given the willingness of many terminated reps to raise the prospect of an arbitration seeking damages for defamation. While truth is most assuredly a defense, we all know that in the funky world of arbitration, legally recognized defenses are often disregarded.

The next requirement outlined in this Notice is “clarifying that the customer has the choice to retain his or her assets at the current firm and be serviced by the newly assigned registered representative or a different registered representative or transfer the assets to another firm.” I can’t argue with this. Too many times, a rep’s departure is immediately followed by a fight over the customers left behind, who are subject to pressured calls from the jilted BD, encouraging them to stay or, worse, not even suggesting that the customers have the right to move, too. Better to make it clear that the BD advise the customer of his or her options.

FINRA gets this. And we know it does by virtue of the final admonition in the Notice, which is that – again, when asked by a customer – BDs must provide the customers the departed RR’s “reasonable contact information,” such as the phone number, email address or mailing address, so the customers may then contact the RR, and decide whether they want to move their accounts or stay with the old BD (albeit with a new RR). So, no more stonewalling by the BD by claiming ignorance of the RR’s new whereabouts in order to buy time to continue to pound on the customer to try to keep the account where it is.

On balance, I like the tenor of this Notice. It seems to be fair to the BD, to the departed RR, and, most importantly, to the customers impacted by the departure. As I said, I am just unsure what prompted it. Is it an effort to protect the RRs who leave, and encounter trouble from their former BDs when trying to get their customers to follow them? Is it, instead, designed to help the BDs, which may now provide all the nasty details surrounding an RR’s termination knowing that they can defend themselves by arguing that “FINRA made me do it?” Is it intended to help the poor, forgotten customers? Or is it a true unicorn, the rarest of beasts, an initiative that works in everyone’s best interest? I don’t suppose I can answer that last one, since, really, I can’t recall if I’ve ever spotted one of those!

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Alan Wolper

Alan focuses his practice exclusively on defending regulatory investigations and enforcement actions brought by the Financial Industry Regulatory Authority (FINRA), the United States Securities & Exchange Commission (SEC), and state securities commissioners against brokers, broker-dealers, and investment auditors. He was previously Director of the National Association of Securities Dealers (NASD) Atlanta District Office, where he oversaw nearly 600 member firms and thousands of branch offices. Alan also served as a member of the NASD’s Department of Enforcement, where he had the primary responsibility for prosecuting hundreds of formal disciplinary actions.