SEC Approves FINRA Proposal to Require Delivery of an Educational Communication to Customers of a Transferring Representative | Practical Law

SEC Approves FINRA Proposal to Require Delivery of an Educational Communication to Customers of a Transferring Representative | Practical Law

The SEC approved a proposal by FINRA to adopt new FINRA Rule 2273 (Educational Communications Related to Recruitment Practices and Account Transfers).

SEC Approves FINRA Proposal to Require Delivery of an Educational Communication to Customers of a Transferring Representative

by Practical Law Corporate & Securities
Published on 28 Mar 2016 • USA (National/Federal)
The SEC approved a proposal by FINRA to adopt new FINRA Rule 2273 (Educational Communications Related to Recruitment Practices and Account Transfers).
On March 23, 2016, the SEC approved new FINRA Rule 2273 (Educational Communications Related to Recruitment Practices and Account Transfers), which will require FINRA member firms (or broker-dealers) to deliver an educational communication to customers of a transferring representative. FINRA plans to announce an implementation date for the new rule at a later date.
The purpose of the new rule is to address issues raised when registered representatives switch their member firm and contact former customers about transferring their assets to the firm that recruited them (recruiting firm). FINRA is concerned that these former customers may not be aware of important factors to consider when deciding whether to transfer their assets to the recruiting firm, including direct costs that they may incur. Therefore, new Rule 2273 will require recruiting firms to deliver an educational communication that highlights key considerations in transferring assets to the recruiting firm, and the direct and indirect impacts of a transfer on those assets. The new rule is intended to encourage former customers to make further inquiries of the transferring representative (and, if necessary, the customer's current firm), to the extent that the customer considers the information important to his or her decision making.
The new rule will require delivery of an educational communication when either:
  • The recruiting firm, directly or through a representative, individually contacts a former customer of that representative to transfer assets.
  • A former customer of the representative, absent individual contact, transfers assets to an account assigned, or to be assigned, to the representative at the recruiting firm.
"Former customer" will mean any customer that had a securities account assigned to a registered person at the representative's previous firm. This term will not include customer accounts that meet the definition of an "institutional account" under FINRA Rule 4512(c) (however, accounts held by a natural person will not qualify for the institutional account exception even if he or she would otherwise meet the definition).
The educational communication will provide the following information:
  • Whether financial incentives received by the representative may create a conflict of interest.
  • That some assets may not be directly transferrable to the recruiting firm and, as a result, the customer may incur:
    • costs to liquidate and move those assets; or
    • account maintenance fees to leave the assets with his or her current firm.
  • Potential costs related to transferring assets to the recruiting firm, including differences in the pricing structure and fees imposed by the customer's current firm and the recruiting firm.
  • Differences in products and services between the customer's current firm and the recruiting firm.
Under the new rule, a broad range of communications by a recruiting firm or its registered representative will trigger the requirement to deliver an educational communication. These communications may include, but are not limited to, oral or written communications by the transferring representative:
  • Informing the former customer that he or she is now associated with the recruiting firm, which will include customer communications permitted under the Protocol for Broker Recruiting.
  • Suggesting that the former customer consider transferring his or her assets or account to the recruiting firm.
  • Informing the former customer that the recruiting firm may offer better or different products or services.
  • Discussing with the former customer the fee or pricing structure of the recruiting firm.
Oral or written communications to a group of former customers will similarly trigger the requirement to deliver the educational communication. These types of oral or written communications by a member, directly or through the representative, to a group of former customers may include, but are not limited to:
  • Mass mailing of information.
  • Sending copies of information via email.
  • Automated phone calls or voicemails.
The new rule will require a member firm to deliver the educational communication at the time of the first individualized contact with a former customer by the member, directly or through the representative, regarding the former customer transferring assets to the member:
  • If the first contact is in writing, the educational communication must accompany the written communication.
  • If the first contact is by electronic communication, the member may hyperlink directly to the educational communication.
  • If the first contact is oral, the recruiting firm or representative must notify the former customer orally that an educational communication that includes important considerations in deciding whether to transfer assets to the recruiting firm will be provided no later than three business days after the contact. In this circumstance, the educational communication must be sent by the earlier of:
    • three business days after the oral contact; or
    • the time at which other documentation is sent to the former customer related to transferring assets to the recruiting firm.
If a former customer seeks to transfer assets to an account assigned, or to be assigned, to the representative at the recruiting firm, but no individualized contact with the former customer occurs before the former customer seeks to transfer assets, the recruiting firm must deliver the educational communication to the former customer with the account transfer approval documentation.
The educational communication requirement will apply for a period of three months following the date that the representative begins employment or associates with the recruiting firm. The educational communication requirements will not apply when the former customer expressly states that he or she is not interested in transferring assets to the recruiting firm. If the former customer later decides to transfer assets to the recruiting firm without further individualized contact within the three months following the date that the representative begins employment or associates with the member, then the educational communication will need to be provided with the account transfer approval documentation.
FINRA will prepare the educational communication to be sent to former customers, and members will not be allowed to use an alternative format. FINRA believes that the FINRA-created uniform educational communication will allow member firms to provide the required communication at a relatively low cost and without significant administrative burdens.
To learn more about the rules governing FINRA's supervision of broker-dealers and their registered representatives, see Practice Note, FINRA Supervision Rules.