FINRA on Friday fulfilled its promise to seek comments on its controversial plan to require brokers to disclose their pay packages.
Comments on the proposed rule, Regulatory Notice 13-02, which requires disclosure of conflicts relating to recruitment compensation practices, must be sent to FINRA by March 5.
FINRA announced Nov. 29 that its board would be mulling such a rule at its Dec. 6 meeting.
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FINRA's proposed rule would require member firms to specifically disclose the financial incentives they give to the representatives they recruit. The recruiting firm would be required to provide the disclosure before the rep's former customers transfer their accounts to the new firm.
Securities lawyer Patrick Burns says that a "number of FINRA member firms, namely wirehouses, offer significant financial incentives to recruit registered representatives to join their firms, yet these compensation arrangements are not disclosed to customers when they are asked to transfer their accounts to a representative's new firm."
The proposed rule states that "FINRA believes that customers would benefit from being told the material conflicts arising from a registered person being paid recruiting incentives to change firms."
However, Burns notes that FINRA's Regulatory Notice 13-02 "makes no mention" of broker retention compensation practices. "It is unclear whether these practices would be considered separately pursuant to a different proposed rule at a later date," he says.
Burns goes on to say that "many of the concerns about front-end recruitment bonuses mentioned in Regulatory Notice 13-02, such as forgivable loans and production-based bonuses, also apply to retention bonuses."
But FINRA's "efforts in requiring more disclosure by brokers about their compensation practices is a move toward providing more information to clients about fees they ultimately pay and conflicts of interest they should be aware of."
What's more, FINRA proposing a rule on recruitment compensation practices "appears to be a move towards treating brokers as fiduciaries," Burns notes. "Many in the brokerage industry have been calling for a common fiduciary standard for brokers and advisors for years. This proposed rule is a step in that direction."
Comments can be submitted by emailing them to [email protected] or mailing them to Marcia E. Asquith, Office of the Corporate Secretary, FINRA 1735 K Street, NW Washington, DC 20006-1506.
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Melanie Waddell
Melanie is senior editor and Washington bureau chief of ThinkAdvisor. Her ThinkAdvisor coverage zeros in on how politics, policy, legislation and regulations affect the investment advisory space. Melanie’s coverage has been cited in various lawmakers’ reports, letters and bills, and in the Labor Department’s fiduciary rule in 2024. In 2019, Melanie received an Honorable Mention, Range of Work by a Single Author award from @Folio. Melanie joined Investment Advisor magazine as New York bureau chief in 2000. She has been a columnist since 2002. She started her career in Washington in 1994, covering financial issues at American Banker. Since 1997, Melanie has been covering investment-related issues, holding senior editorial positions at American Banker publications in both Washington and New York. Briefly, she was content chief for Internet Capital Group’s EFinancialWorld in New York and wrote freelance articles for Institutional Investor. Melanie holds a bachelor’s degree in English from Towson University. She interned at The Baltimore Sun and its suburban edition.
