SEC Approves Compensation-Disclosure Rule that Brokers Can Live With
The Securities and Exchange Commission has approved a compensation disclosure rule from the Financial Industry Regulatory Authority that in an earlier form had sent chills down the spines of brokers and recruiters.
The rule requires brokers who take new jobs to provide an “educational communication” about incentives and potential conflicts when reaching out to clients about moving their accounts. A Finra spokeswoman said the regulator plans to announce the timing of the implementation in a “forthcoming notice.”
In the more than two-and-a-half years that have passed since Finra’s board first approved a potential compensation disclosure rule, the details of what brokers must reveal to potential clients have been significantly diluted. Finra initially proposed requiring brokers who receive recruiting bonuses of $100,000 or higher to disclose them to prospective clients, using compensation ranges, throughout their first 12 months at their new firms.
Headhunters and branch managers cried “foul,” claiming such a rule would violate privacy laws and was unnecessary because Finra had never shown a connection between recruiting incentives and bad behavior by brokers trying to meet production goals.
Under the final proposal approved on Wednesday by the SEC, the communication content is much more general and the disclosure period has been cut to three months.
The rule requires brokers to provide a discussion by letter or online of subjects ranging from potential conflicts of interest to costs clients could incur if some investments cannot be transferred to the broker’s new firm.
The SEC—which delegates some of its regulatory powers to Finra, which is financed by the industry it regulates—said that the proposed rule serves a valuable purpose despite the revisions.
“The Commission believes that the increase in information and communication about the potential implications of transferring assets will benefit customers when deciding whether to transfer assets,” the approving order says. “While educating former customers about important considerations to make an informed decision whether to transfer assets to the recruiting firm, FINRA believes the proposed rule eliminates or reduces the privacy and operational concerns raised regarding the previous proposal.”
The SEC believes that the proposed educational communication “may encourage former customers to make inquiries of their representatives, which could increase communication between customers and representatives about the potential implications of transferring assets,” the Commission wrote.
Finra will consider the systemic, operational and compliance changes that brokerage firms must make to comply with the rule in determining when it will become effective, the SEC said.