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FINRA Proposes A New Rule Which Would Require Brokers To Disclose Transition Compensation

The Financial Industry Regulatory Authority, Inc. (“FINRA”) proposed a new rule which would require brokers and registered representatives to disclose their transition packages when switching from one broker-dealer to another firm. Specifically, the proposed rule would require financial advisors to disclose bonuses and other compensation they received as a result of transitioning between investment firms. According to the FINRA Rule proposal, “enhanced compensation packages offered to recruit a representative to leave one firm and join another provide an additional and significant layer of compensation on top of the commission payout grid compensation that the representative receives based on bonus or a foregiveable loan.” Moreover, the FINRA Rule proposal states that many types of enhanced compensation transition packages lead to registered representatives believing they must sell securities and violate obligations to investors in order to justify the special transition packages they received. This creates increased regulatory concerns for FINRA and the Securities and Exchange Commission (“SEC”). Many industry experts believe this will thwart the number of transitions that are based solely on broker compensation packages since the rule will require that brokers articulate to clients that the transition was based on the new firm providing better financial services, rather than based on the compensation. Indeed, Jennifer McPhee, Managing Director of Merrill Lynch Wealth Management made the following statement to the media, “[Brokers] really shouldn’t come just for a check. I think this will force the people who are moving for the wrong reasons to rethink that.” Other financial services professionals believe that if the proposed FINRA rule is implemented it will have a very small impact on the number of brokers transitioning between firms. Jason Chandler, head of the Wealth Management Advisor Group and Private Wealth Management at UBS stated to the media, “I don’t think it will have a dramatic impact on the recruiting market, especially at the high end where people have really deep relationships with their clients.” It will be interesting to see whether there will be a large numbers of transitions prior to the possible implementation of the new rule, in order for registered representatives to escape the disclosure requirement. Many industry experts, broker-dealers, financial services professionals and attorneys submitted comments regarding the proposed rule. Lax & Neville LLP submitted a comment which can be viewed here: Lax & Neville LLP Comment On FINRA Proposed Rule. Currently, FINRA is reviewing the comments in response to this proposed rule change to determine whether the proposed rule should be submitted to the SEC for approval.

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