FINRA Requests Comment on Proposal That Would Require Delivery of an Educational Communication to Customers of a Transferring Representative | Practical Law

FINRA Requests Comment on Proposal That Would Require Delivery of an Educational Communication to Customers of a Transferring Representative | Practical Law

FINRA is requesting comment on a proposal that would require delivery of an educational communication to customers of a transferring representative.

FINRA Requests Comment on Proposal That Would Require Delivery of an Educational Communication to Customers of a Transferring Representative

by Practical Law Corporate & Securities
Published on 28 May 2015 • USA (National/Federal)
FINRA is requesting comment on a proposal that would require delivery of an educational communication to customers of a transferring representative.
On May 27, 2015, FINRA issued a regulatory notice requesting comment on a proposed rule that would require member firms that hire or associate with a registered representative (recruiting firm) to provide an educational communication to former retail customers of the transferring representative who the member, directly or through the transferring representative, attempts to induce to transfer assets to the recruiting firm or who choose to transfer assets to the recruiting firm. FINRA had originally issued a proposal in March 2014, but withdrew it in June 2014 to further consider comments it received. It has now issued a revised proposal.
Under the proposal, the educational communication would be required to highlight the potential implications of transferring assets to the recruiting firm and suggest questions the customer may want to ask in making an informed decision about:
  • Whether financial incentives received by the representative may create a conflict of interest.
  • Assets that may not be directly transferrable to the recruiting firm, which may result in the customer incurring costs to liquidate and move those assets or inactivity fees to leave them with the customer's current firm.
  • Potential costs related to the transfer of assets to the recruiting firm, including differences in the pricing structure and fees imposed between the customer's current firm and the recruiting firm.
  • Differences in products and services between the customer's current firm and the recruiting firm.
The proposal would require the educational communication to be provided at or shortly after the time of first contact with a customer regarding the transfer of assets to the recruiting firm, as follows:
  • If the contact is in writing, the educational communication must accompany the written communication.
  • If the contact is by electronic communication, the recruiting firm may hyperlink directly to the educational communication.
  • If the contact is oral:
    • the educational communication must be sent to the customer within three business days or with any other communication sent by the recruiting firm to the former customer in connection with a potential transfer of assets, whichever is earlier; and
    • the recruiting firm or representative must inform the former customer that the customer will be receiving a document containing important considerations in determining whether to transfer assets to the recruiting firm.
The proposal would also require the educational communication to be provided to a former customer who seeks to transfer assets to an account assigned, or to be assigned, to the representative at the recruiting firm absent contact. The communication would need to include the account transfer approval documentation.
While the proposal does not set out specific supervisory procedures, FINRA expects that firms can implement a system reasonably designed to achieve compliance with the delivery requirements through training, spot checks, certifications or other measures. The requirement to provide the communication would apply for six months following the date that the registered representative begins employment or associates with the recruiting firm.
The requirement to provide the communication would 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 six months following the date the registered representative begins employment or associates with the member, then delivery of the communication with the account transfer approval documentation would be required.
FINRA is accepting comments until July 13, 2015.
In addition, on May 27, 2015, FINRA issued a proposed rule change that would amend FINRA Rule 2210 to require each of a member's websites to include a readily-apparent reference and hyperlink to BrokerCheck (giving access to a firm's or its registered person's disciplinary history) on:
  • The initial webpage that the member intends to be viewed by retail investors.
  • Any other webpage that includes a professional profile of one or more registered persons who conduct business with retail investors.
These requirements would not apply to:
  • A member that does not provide products or services to retail investors.
  • A directory or list of registered persons limited to names and contact information.
Update: The original rule proposal amending Rule 2210 was withdrawn on June 29, 2015, and replaced by a new proposal with no substantive changes.
Update: On October 8, 2015, the SEC approved the proposed rule change.