By George C. Miller, Esq.  of Shustak Reynolds & Partners, P.C. posted on Thursday, December 17, 2015.

George C. Miller

Partner

Location: San Diego, California
Phone: (619) 696-9500 (Ext. 105)
Direct: (619) 501-8270
Email: [email protected]

On Wednesday, the Financial Industry Regulatory Authority (FINRA) submitted proposed Rule 2273 to the SEC for formal approval.  The rule, titled “Educational Communication Related to Recruitment Practices and Account Transfers,” would require financial advisors who are transitioning from one firm to another to provide an “educational communication” to clients in connection with the transition. The document, which will be prepared by FINRA, lists questions clients should consider asking their financial advisor in connection with his or her transition to a new broker-dealer. The proposed questions included in the “educational communication” include:

-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?

FINRA “believes the proposed rule change will promote investor protection by highlighting important conflict and cost considerations of transferring assets and encouraging customers to make further inquiries to reach an informed decision about whether to transfer assets to the recruiting firm…”. Any of the above questions could cause a client to more thoroughly consider following an advisor to a new firm, which may be a good thing. Both investors and financial professionals should consider the practical implications of and difficulties associated with transitioning from one firm to another. 

Perhaps most concerning for financial advisors, however, is question number one – whether “financial incentives” relating to the transition could create a conflict of interest between the broker and client. Financial advisors are routinely offered up-front “bonuses” and other transition compensation when moving from one firm to another. These bonuses are often tied to promissory notes forgiven over a period of 7-10+ years, and the amount of compensation offered varies greatly among firms.  Some investors may be surprised to learn, for example, that their broker could receive millions of dollars in bonus/up-front loan monies in moving from one firm to another. That could cause investors to question the motivations behind the move, and advisors understandably may be uncomfortable discussing the terms of their transition compensation with clients. But, at least for advisors, Rule 2273 does not go as far as it could. An earlier version of the rule required automatic disclosure of the financial aspects of the broker’s transition. FINRA revised the proposed rule after strong opposition from the brokerage industry. 

Shustak Reynolds & Partners, P.C.’s attorneys have extensive experience in representing brokers and financial advisors in recruitment, employment and wrongful termination claims, promissory note disputes, FINRA arbitrations and regulatory proceedings. Contact us today for a complimentary and confidential analysis of your situation.

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