U.S. securities regulators are proposing that brokers that are poached away from a rival firm be required to tell clients about any added compensation they may be receiving as a result of the move.
The Financial Industry Regulatory Authority (FINRA), is seeking comment on a proposed rule that would require specific disclosure by the recruiting firm of the financial incentives a rep receives as part of their relationship with their new firm. The disclosure would have to be made before a client decides whether to transfer their account to the new firm.
The rule is aimed at addressing conflicts of interest that can arise when firms offer significant financial incentives to recruit reps to join their firms, yet these arrangements are not disclosed to customers when they are asked to transfer their accounts to the new firm. The added disclosure requirements would apply to compensation provided beyond ordinary grid-based payouts.
“The proposed rule focuses on the undisclosed conflict that representatives have received lucrative financial incentives, often based on trailing production, to move firms, and customers that are solicited to follow their representatives are not directly notified of these practices,” FINRA says in a notice. “FINRA believes that customers would benefit from knowing the incentives that may have led their representative to change firms before they transfer an account to a new firm.”
So, it is seeking comment on a proposed rule that would require firms to disclose the details of any enhanced compensation to retail clients from the recruited rep’s former firm for a year after they move shops. The sorts of enhanced compensation covered by the rule would include things such as signing bonuses, upfront or back-end bonuses, loans, accelerated payouts, transition assistance and similar arrangements, it notes. But it would not include receiving a higher payout at the new firm.
Comments on the proposal are due March 5.