Industry observers expect FINRA may soon begin requiring that highly-paid brokers who are lured from one financial services firm to a competitor must disclose any “enhanced compensation” that sweetened the employment offer. The Wall Street Journal reported on the expected move recently in an article titled “Brokers Face Pay Disclosures.”
FINRA closed comments in March on a proposed rule to require disclosure of conflicts of interest relating to recruitment compensation practices (Regulatory Notice 13-02).
At issue is what brokers must disclose when clients naturally follow them to a new firm on the basis of personal relationships, or when the broker attempts to encourage a client to move their account to the broker’s new place of employment.
The term “enhanced compensation” means compensation paid in connection with the transfer of securities employment to the recruiting firm, other than the compensation normally paid by the recruiting firm to its established registered persons. Enhanced compensation includes but is not limited to:
- Signing bonuses
- Upfront or back-end bonuses
- Accelerated payouts
- Transition assistance
- Other similar payments
Investor protection is behind FINRA’s initiative. Many member firms offer significant financial incentives to recruit registered representatives to join their firms, according to FINRA, yet these compensation arrangements are not disclosed to customers when they are asked to transfer their accounts to a representative’s new firm.
Morgan Stanley, with 17,000 financial advisors, “fully supports the uniform disclosure of firms’ recruiting compensation arrangements as outlined in the Rule Proposal,” according to a firm comment letter submitted to FINRA. The University of Miami School of Law Investor Rights Clinic “supports the aims of transparency and disclosure … but would suggest certain modifications.” Click on the link to read all FINRA comment letters.
The proposed FINRA rules are intended to apply to financial services companies regulated by the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), state securities authorities, and related firms.
Exemptions are provided for compensation under $50,000 or institutional customer accounts.
Fort Lauderdale Securities Litigation and Arbitration Attorney
Contact Fort Lauderdale securities litigation and arbitration attorney Howard N. Kahn, Esq. if you or someone you know has a securities or broker dispute. He is an experienced securities litigation and arbitration attorney, and is available to assist individual investors, brokers, and brokerage firms involved in securities matters. You can reach him at 954-321-0176 or online.