September 19, 2013
by Mark Schoeff Jr., Investment News
Rule goes to Securities and Exchange Commission for consideration
The board of the Financial Industry Regulatory Authority Inc. has approved a proposal that would require brokers to disclose the amount of incentive pay they received to switch firms.
Recruiting compensation of $100,000 or more — including signing, upfront or back-end bonuses, loans, accelerated payouts and transition assistance — would have to be disclosed to any customer who followed a broker to a new firm within one year of his or her transition. The broker also would have to disclose future compensation based on performance.
The reporting threshold was increased from the $50,000 level in the original Finra proposal released this year.
Firms would have to disclose to customers compensation paid to new recruits in the ranges of $100,000 to $500,000, $500,000 to $1 million and higher. They also would have to report to Finra any significant increases in a new hire’s compensation over his or her first year if it amounted to 25% or $100,000, whichever were higher. Finra intends to use the information to target examinations of sales abuses.
In addition, firms would have to tell customers following a broker whether they will incur costs for moving their assets and whether some of them can’t be transferred.
The rule now goes to the Securities and Exchange Commission for review and approval. The agency may make revisions and put the proposal out for comment.
Finra officials say the rule is designed to highlight potential conflicts of interest for hotshot brokers who move from firm to firm.
“This proposal is about making sure the customer can make a fully informed decision to follow a broker to a new firm and understand the cost associated with transferring his or her account,” Finra chief executive Rick Ketchum said in a statement. “This proposal reflects our commitment to transparency and investor protection.”
The original proposal generated about 65 comment letters and a steady stream of criticism from independent-broker dealers and financial advisers. Wirehouse firms generally support the rule while critics said the rule should have included retention bonuses. The proposal does not address that issue.
The Financial Services Institute Inc., which represents independent broker-dealers and financial advisers, said it is pleased that the reporting threshold was raised to $100,000 from $50,000 but it is waiting for more details before deciding whether to support the rule.
“We look forward to closely examining Finra’s proposal to see if it achieves the goal of providing investors with meaningful disclosure of material conflicts of interest without unnecessarily compromising financial advisers’ privacy,” said David Bellaire, FSI executive vice president and general counsel.
The higher limit for reporting gives the independent sector a break.“Most of the transition packages in the independent channel fall under the $100,000 benchmark,” said Jon Henschen, president of Henschen & Associates LLC, a broker recruiting firm. “They won’t have any disclosure requirements.”
While the SEC mulls over the rule, its advance may spur some brokers to make career decisions.
“In the short-term, it may accelerate the moves of advisers who are on the fence,” said Mindy Diamond, president of Diamond Consultants LLC, a search and consulting firm.
Advisers with high-net-worth clients aren’t too concerned about the rule, according to Ms. Diamond, who said smaller advisers who generate about $1 million in revenue annually and whose clients have about $500,000 in assets might be put off by the new disclosures.
“It’s tough to tell those clients you’re being paid $3 million to switch firms,” Ms. Diamond said.Wirehouses are backing the rule because they’re getting tired of paying huge recruiting incentives and are looking to Finra for help, Mr. Henschen asserted. “They’re the obvious motivators in pushing this through,” Mr. Henschen said. “Crony capitalism lives.”
The regulator weighed input from the comment letters and proposed a rule that achieves “a great balance,” John “Jack” Brennan, the Finra board’s lead governor and chairman emeritus of the Vanguard Group Inc., said in a video on Finra’s website.
“In many ways, it’s the best of the Finra rulemaking process,” Mr. Brennan said.