On March 29, 2016, the Securities and Exchange Commission (“SEC”) approved new Financial Industry Regulatory Authority (“FINRA”) Rule 2273 – Educational Communication Related to Recruitment Practices and Account Transfers.
For some time, FINRA has expressed its concern with the potential for conflicts when a registered representative moves to a new firm and attempts to recruit customers he or she served at a previous firm. The new rule requires firms to provide FINRA-developed educational communications to these customers prior to initiating any transfer of accounts to the new firm. Although a customer may have total confidence in a registered representative and no desire to terminate the relationship with that individual, FINRA has concerns that these customers may be unaware of certain important factors when transferring an account, such as costs that they may incur.
To ensure customer awareness of these factors, the new rule requires delivery of the educational communication when "the member, 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."
The term “former customer” refers to any individual who maintained a securities account with the representative at a previous firm. Institutional accounts are exempt from this rule, unless the account was held by a natural person.
The FINRA-developed disclosures would highlight the following:
- 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 incur account maintenance fees to leave them with his or her current firm;
- Potential costs related to transferring assets to the new firm, including different pricing structures or fees imposed by the customer’s current firm compared to those of the new firm; and
- Potential differences in products and services between the customer’s current firm and the new firm.
FINRA believes that a variety of types of written or verbal communications with a former customer could trigger the educational material delivery requirement. This includes communications short of solicitation, such as simply notifying a customer that a representative is moving to a new firm. Furthermore, the rule would require that this material be delivered at the time the representative first makes individualized contact with a former customer.
FINRA will allow the educational material to be hand delivered, mailed, or sent electronically. However, firms may not substitute their own information for the FINRA-produced educational material.
FINRA has not yet stated an effective date for the new rule.