By Erwin J. Shustak, Esq.  of Shustak Reynolds & Partners, P.C. posted on Thursday, May 28, 2015.

Erwin J. Shustak

Managing Partner

Location: San Diego, California
New York, New York
Phone: (619) 696-9500 (Ext. 109)
(800) 496-5900 (Ext. 109)
Email: [email protected]

After dropping its proposal in June, 2013 that would have required brokers to disclose recruiting bonuses and "up-front" forgivable loans they receive for switching firms, FINRA (the Financial Industry Regulatory Authority), which oversees all broker-dealers and the more than 650,000 registered financial representatives, yesterday released a revised compensation disclosure proposal.

Under the revised proposal, all brokerage firms would be required to send an "educational communication" to clients of transitioning brokers outlining questions they should ask their broker about compensation and other inducements the broker receives for switching firms. The proposed rule would require all broker-dealers to send that communication to clients working with a broker who is moving to a new firm. The document would list questions investors should ask their broker about compensation and other inducements the broker is receiving from the new firm, including the amount of any traditional, "up front" forgivable loans that are common in the industry and often reach into the millions of dollars.

According to FINRA, the questions would help investors determine whether the financial incentives their broker is receiving to change firm affiliations creates a conflict of interest and whether the customers would incur costs by following that broker to his or her new firm.

The revised rule is a modification of the rule FINRA proposed, and then withdrew, back in 2013. The original rule would have required brokers to disclose to customers all recruiting incentives above $100,000 they received for switching firms. It also would have required firms to report to FINRA all "significant" compensation increases for recruited brokers.

Critics of the revised, "educational communication" rule call it a watered down version that does not go far enough to educate investors of exactly what compensation and incentives their broker is receiving for changing firms. According to FINRA, however, "...the revised proposal is a more effective approach. The educational communication allows for more context and explanation about financial incentives and is more likely to prompt a discussion with the transferring representative or current firm".

Brokers, on the other hand, would rather not have to explain the amount and nature of their transition packages for obvious reasons. There also is concern that firms will use this "educational communication" as a way to increase their leverage to keep clients of departing brokers.

FINRA is soliciting public comments on the proposal until July 13th.

Shustak Reynolds & Partners, P.C. focuses in the area of financial services law, representing broker-dealers, financial institutions, registered persons, investment advisors and advisory firms, hedge funds, investment advisors and others in the financial world. Contact us with any questions you may have.

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