The proposal needs to be submitted to the Securities and Exchange Commission (SEC). If approved, brokers would need to disclose their recruitment compensation to any customers that choose to follow them to their new firm for a full year.
If investors choose to switch firms along with the broker, they can face fees if they must sell securities that are branded products at the broker’s previous 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 costs associated with transferring his or her account,” said Richard Ketchum, chairman and chief executive of FINRA. The proposal addresses transparency and investor protection, Ketchum said.
The proposal contains two components: a disclosure obligation and reporting to FINRA. The disclosure requirement would apply to recruitment compensation – including signing bonuses, up-front or back-end bonuses, loans, accelerated payouts, and transition assistance – of $100,000 or more, and to future payments (trade-based or asset-based) contingent on performance criteria. Firms would be required to disclose to their customers the compensation paid to the transferring representative in ranges. The first range would be $100,000 to $500,000; the next would be $500,000 to $1 million; followed by increasingly larger bands.
Firms would also be required to report to FINRA significant increases in total compensation paid to a newly recruited representative during the first year. The trigger for reporting would be an expected increase of either 25% or $100,000 over the prior year’s compensation, whichever is greater. This information will be used in risk-based examination targeting to look for sales abuses that may be motivated by the increased compensation and to inform any future rulemaking related to compensation incentives.
Firms also would be required to disclose whether costs would accrue if a customer decides to transfer assets to the new firm and that certain assets may not be transferrable.