FINRA Withdraws B/D Compensation Proposal

The Financial Industry Regulatory Authority (FINRA) backed off its proposal requiring broker/dealers to disclose financial incentives to move to a new firm.  

Last fall, FINRA proposed a rule that would require broker/dealers to disclose compensation agreements. (See “FINRA Yanks Veil Away from Broker Bonuses.”) In a statement, the regulator now says that even though it has withdrawn the proposal, it continues to believe that recruitment disclosures remain an important investor protection issue. The issue is likely not over. FINRA says it plans to revise the proposal and file it with the Securities and Exchange Commission (SEC) later this year.

The proposal generated 184 comment letters. Because of rigid timelines imposed by the Dodd-Frank Act that state the time frame in which the SEC must act on a proposal, FINRA did not believe it could fully address the comments and adhere to the schedule.

The Financial Services Institute (FSI) says in a statement that many of its members have concerns about the recruitment compensation disclosure proposal, including a lack of transparent cost-benefit analysis. They say they encourage the regulator to conduct a thorough cost-benefit analysis of the rule and share the results with the industry, should FINRA re-propose the rule, which should include a careful assessment of the proposal’s impact on firms, financial advisers and investors.

J. Kevin Stophel, an adviser with Kumquat, a wealth management firm in Tennessee, says he believes it is “a travesty that such an information black hole is being allowed to continue.” Full disclosure of all compensation related to client financial relationships and transactions should be a critical component of financial consumer evaluation and decision-making, Stophel tells PLANADVISER. Such disclosure is an ethically driven practice for financial services firms.

The lack of an industry requirement to disclose transition compensation means that financial consumers are missing out on relevant information, Stophel feels, which could significantly affect how they might see a broker/dealer’s transition and whether they would decide to follow the financial professional to a new firm or not.

FINRA says it continues to believe that former customers of broker/dealers would benefit from knowing that financial incentives may have motivated their representative to change firms. Investors should also know the costs associated with transferring assets to a new firm and be informed if moving their assets to the recruiting firm will have an impact on their holdings. In other words, they should know that some assets may be orphaned, FINRA says in its statement about the proposal.

FINRA says it intends to consider the comment letters, continue a dialogue with the SEC and file a revised proposal as soon as practical.