U.S. regulators are proposing a rule that would require brokers to disclose the compensation they are paid as an incentive to switch firms.
The U.S. self-regulatory organization, the Financial Industry Regulatory Authority (FINRA), said Thursday that its board approved a proposal requiring brokers to disclose the recruitment compensation they are paid when moving to a new firm.
If it’s approved by the U.S. Securities and Exchange Commission (SEC), brokers would need to disclose their recruitment compensation to any customers that choose to follow them to their new firm for a full year.
The disclosure requirement would apply to various forms of recruitment compensation including signing bonuses, up-front or back-end bonuses, loans, accelerated payouts, and transition assistance of US$100,000 or more, and to future payments (trade-based or asset-based) that is contingent on performance criteria. The disclosure would be made in ranges: US$100,000 to US$500,000; US$500,000 to US$1 million; and so on, in increasingly larger bands.
Additionally, firms would be required to report significant increases in total compensation paid to a newly recruited representative during the first year to FINRA. The trigger for reporting would be an expected increase of 25%, or US$100,000 over the prior year’s compensation, whichever is greater. The regulator says that this information will be used 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.
“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, FINRA’s chairman and CEO.