FINRA is pressing ahead with a controversial new rule that would require brokers to make disclosures about recruitment compensation they receive as an enticement to jump to a new firm.
At FINRA's September meeting last month, the regulatory group's board of directors signed off on the proposal, which next heads to the Securities and Exchange Commission for review.
If the SEC approves the plan, brokers would have to notify clients who follow them to their new firm about the recruitment compensation they received. Those disclosures would be required for transplant clients who follow their brokers within their first year at the new firm.
"This proposal is about making sure the customer can make a fully informed decision to follow a broker to a new firm and understand the costs associated with transferring his or her account," FINRA Chairman and CEO Richard Ketchum said in a statement, adding that the "proposal reflects our commitment to transparency and investor protection."
FINRA is proposing a tiered system of disclosures. As a starting point, FINRA is looking to set a minimum threshold that would trigger the notification requirement at $100,000 in recruitment compensation, which covers "signing bonuses, up-front or back-end bonuses, loans, accelerated payouts and transition assistance." Future payouts based on performance criteria that contribute would also warrant disclosures.
Firms would be required to notify their customers of the value of the incentives for transferring brokers in ranges, beginning with $100,000 to $500,000, then $500,000 to $1 million, and scaling up for larger payouts.
The minimum threshold in the new rule is a substantial revision from the FINRA's earlier proposal, which would have mandated disclosures beginning at $50,000 in recruitment compensation.
Large financial houses were generally supportive of FINRA's initial proposal, praising the disclosure requirements for their potential to better inform investors and guard against conflicts.
"The proposed disclosure plan will offer transparency to wealth management clients and be better for the industry as a whole," Bob McCann, CEO of UBS Group Americas, wrote in an email. "I see this as a significant change for the wealth management industry, its clients and financial advisors."
The Financial Services Institute, a trade group representing independent broker-dealers and advisors, says it supports the goal of disclosing potential conflicts of interest, but criticized the initial rule in comments to FINRA for being at once "overbroad and under-inclusive." The FSI criticized FINRA for leaving out other forms of compensation that it said could invite conflicts, such as retention bonuses, and warned that the disclosures of broker compensation could amount to an erosion of privacy for its members.
David Bellaire, FSI's general counsel and executive vice president, said that doubling the disclosure trigger to $100,000 was an encouraging modification, but that it remains to be seen whether the group's other concerns have been addressed.
"We appreciate FINRA raising the dollar threshold for recruitment compensation disclosures to the proposal," Bellaire said in an emailed statement. "We look forward to closely examining FINRA's proposal to see if it achieves the goal of providing investors with meaningful disclosures of material conflicts of interest without unnecessarily compromising financial advisor privacy."
In addition to the client-disclosure rules, the new proposal would direct firms to report to FINRA if a newly recruited broker received total compensation that exceeded their prior year's earnings by 25% or $100,000-whichever is more.
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