by Jacqueline Smith
Many securities firms offer brokers enhanced compensation packages to transfer from one firm to another. Enhanced compensation packages, which currently are not disclosed to customers, provide an additional amount of compensation, over and above commissions, that often include some combination of upfront bonuses, forgivable loans, transaction assistance, and back-end bonuses. These financial incentives and increased commission targets create the concern that brokers may be motivated to engage in conduct that would violate their obligations to investors.
To address these conflicts of interest relating to compensation practices, FINRA is considering a new rule focused on protecting customers. The proposed rule would require a firm that provides a recruited broker enhanced compensation related to transferring firms to provide the details of the enhanced compensation for one year to any former customer of the broker who either (1) is contacted by the broker regarding the transfer of the broker’s employment to the firm, or (2) seeks to transfer an account from the previous firm to an account assigned to the broker. The proposed rule would also require that the details of the enhanced compensation be made at the time of first individualized contact by the firm or broker after the broker has terminated association with the previous firm. If the disclosure is made orally, or if a customer seeks to transfer an account when no individualized contact occurred, written disclosure would be required with the account transfer approval documentation. A general disclosure would not be sufficient; rather, the rule proposes that the written disclosure be clear, prominent, and include information regarding the timing, amount, and nature of the enhanced compensation. As a result, this disclosure would provide customers with transparency regarding the true motivation behind a broker’s decision to transfer firms, and would allow customers to ascertain whether to transfer their business to the new firm. The proposed rule would not apply to institutional accounts, and firms would not be required to disclose enhanced compensation that is less than $50,000.
FINRA is requesting comments on the proposed rule until March 5, 2013.