FINRA Requires Client Education

This week, the SEC approved a proposed FINRA rule change that will require educational materials to be supplied to investors who are considering transferring their accounts in order to follow their representative as he/she switches from one member firm to another.

FINRA Rule 2273, which appeared in the December 30, 2015 issue of the Federal Register, has now been approved, after completing its comment period and an SEC review. No implementation date for the new rule has been established yet, though in response to one commenter, FINRA noted that it "will consider the need to develop compliance systems and make operational changes in establishing an effective date for the proposed rule."

The rule arises out of FINRA's concern that "former customers’ confidence in and prior experience with the representative may be one of the customers’ most important considerations in determining whether to transfer assets to the recruiting firm," to the extent that the customer may ignore (or be unaware of) other important factors to consider, including the direct cost of asset transfer.  As a result, FINRA proposed that a concise, plain-English document that educates customers on the potential implications of transferring assets be provided to them. The document would cover:

1. Conflicts of interest created by any financial incentives received by the representative.
2. The possibility that some assets may not be directly transferrable to the recruiting firm, meaning the customer would have to choose between liquidating them or leaving them at their current firm.
3. Potential costs related to transferring assets to the recruiting firm, and any differences in the pricing structure and fees imposed by the customer’s current firm compared to the recruiting firm.
4. Differences in products and services between the customer’s current firm and the recruiting firm.

Either oral or written communication by the transferring representative to the former customer would trigger the requirement to simultaneously provide the educational materials outlined above. Mass mailings (or voicemails) by the member firm targeting a group of former customers would also trigger the requirement to provide the educational materials, even if that communication did not come directly through the representative. 

The type of communication between the rep and former customer that would trigger the requirement includes:

1. Informing the former customer that he or she is now associated with the recruiting firm, which would include customer communications permitted under the Protocol for Broker Recruiting.
2. Suggesting that the former customer consider transferring his or her assets or account to the recruiting firm.
3. Informing the former customer that the recruiting firm may offer better or different products or services.
4. Discussing with the former customer the fee or pricing structure of the recruiting firm.

In short, if the member or the representative contacts a former customer of that representative to transfer assets, or a former customer of the representative (absent individual contact) transfers assets to an account assigned (or to be assigned) to the representative at the new member firm, they must provide the aforementioned educational materials to that customer.