SEC approves FINRA Rule 2273 (Educational Communication Related to Recruitment Practices and Account Transfers).

By March 29, 2016 September 20th, 2017 News

The SEC has approved a FINRA rule that requires brokers switching firms to deliver an “educational communication” to customers who are considering transferring their investments to the broker’s new firm. The final version of the rule, FINRA Rule 2273, is designed to encourage conversation between customers and their brokers about the advantages and disadvantages of moving assets to the broker’s new firm.

According to the SEC’s approval order, dated March 23, 2016, the rule would apply when…

  • the member [broker-dealer], directly or through a representative, individually contacts a former customer of that representative to transfer assets; or
  • a former customer of the representative, absent individual contact, transfers assets to an account assigned, or to be assigned, to the representative at the member.

When the customer, independently and absent of any individualized contact by the broker or representative, seeks to transfer assets, the rule mandates that an educational communication must accompany account transfer approval documentation. Additionally, FINRA has stated that the member must provide the educational communication within 3 business days following individualized contact with the customer. Delivery of the educational communication requirement applies for three months starting with broker’s beginning date of employment or association with the member firm.

While the relationship between the customer and broker may be the most important factor when a customer considers moving funds, FINRA has been concerned that “customers may not be aware of other important factors” when considering a transfer of assets to the recruiting firm. The educational communication is intended to provide customers with “a complete picture of the potential implications of a decision to transfer assets…and the direct and indirect impacts of such a transfer on those assets.”

Specifically, the educational communication is required to contain information concerning…

(1) compensation initiatives that may give rise to potential conflicts of interest,

(2) information about liquidation costs associated with liquidating assets that would not otherwise be directly transferable to the recruiting firm,

(3) differences in pricing structures, and

(4) differences in products and services provided by the customer’s current firm and the broker’s recruiting firm.

After rounds of comments from industry representatives, and pushback from brokers concerning privacy risks, the rule has evolved into a workable form that the SEC does not believe will impose an undue burden on brokers. The opinion of the Commission and FINRA seems to be that for brokers already actively communicating with their customers and fully compliant, the new rule is a non-event.

See also:

https://www.finra.org/industry/rule-filings/sr-finra-2015-057

https://www.sec.gov/rules/sro/finra/2016/34-77430.pdf

http://www.investmentnews.com/article/20151217/FREE/151219927/finra-sends-broker-compensation-proposal-to-sec-for-approval

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