With just a few weeks remaining until the close of the comment period (ending March 5, 2013), the brokerage industry nearly uniformly has given a chilly reception to FINRA’s proposal to require disclosure of broker recruiting incentives to customers when an individual broker is recruited to a new firm. FINRA’s Regulatory Notice 13-02 proposes mandatory disclosures to customers of the details of “enhanced compensation” packages offered by firms to recruit brokers at the time of first contact following a broker’s departure, and in writing with account transfer documentation. “Enhanced compensation” includes the typical recruitment packages brokerage firms provide to entice brokers to move to new firms, such as signing bonuses, upfront or back-end bonuses, loans, accelerated payouts, transition assistance, and similar arrangements. The proposed rule does not require disclosure of “enhanced compensation” of less than $50,000 and to certain institutional investors.
The proposal elicited strong and decidedly negative reaction from the industry. Some comments raised concerns about adding to the avalanche of regulation and disclosure requirements. Others noted that disclosures of these packages may be too complex or immaterial to the majority of customers. Another suggested that the proposal is anti-competitive and will harm brokers’ ability to freely switch firms. A comment from The Securities Industry Professional Association raised the specter that unscrupulous customers could take advantage of disclosures by seeking a cut of the broker’s enhanced compensation.
The proposal continues FINRA’s trend toward expansive implementation of fiduciary-based disclosure requirements for brokers. It is unclear the extent to which implementation of the rule will affect competition for talent, or if it will have the effect of “evening the playing field” between the largest wirehouses, which typically offer the largest recruiting packages, and their smaller competitors. If fully implemented – as appears likely – the Rule could have a profound effect on the way firms offer recruiting incentives, and on the free movement of brokers between firms. Certainly, it will make for some very interesting and delicate calls between departing brokers and their customers.
Member firms that utilize enhanced compensation for their recruiting efforts should consider the FINRA’s proposed rule and its potential implications.
