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FINRA Approves Proposed Rule Change Requiring Broker Disclosure Of Incentive Compensation

On Thursday, September 19, 2013, the Financial Industry Regulatory Authority, Inc. (“FINRA”) Board held a meeting during which it considered whether brokers and associated persons should disclose recruiting incentives and bonuses to their clients. After Thursday’s FINRA meeting, FINRA approved the proposal which will require recruiting compensation of $100,000 or more to be disclosed to any customer who followed the broker to the new firm within one year of the transition, and also would have to disclose future compensation based on performance. Furthermore, FINRA member firms will have to disclose to customers compensation paid to new recruits over $100,000, as well as report to FINRA any increase to the recruits compensation during the first year if the increase amounts to a 25% or $100,000 increase, whichever is higher. Originally, the FINRA proposal requires brokers to disclose recruitment compensation packages that are greater than $50,000, including, but not limited to, signing bonuses, upfront and back-end bonuses, loans, accelerated payouts, transition assistance, to any client they solicited for one year following their transition to their new firm. FINRA’s Chief Executive, Richard G. Ketchum, reported that the rule is meant to present potential conflicts of interest to customers. Indeed, Ketchum made the following statement to the media, “We believe investors should be informed of conflicts involving recruitment packages when they make the important decision to move an account, especially when the decision to move means having to sell off proprietary products and taking a possible tax hit. When a broker moves to a new firm and calls a customer and says ‘You should move your account with me because it will be good for you,’ the customer needs to know all of the broker’s motivations for moving.” After it proposed this change in July 2013, FINRA received over 65 comments letters. Many investment firms, including Morgan Stanley Wealth Management, are proponents of the change and believe it will help protect customers. On the other hand, opponents believe broker-dealers and investment firms are behind the proposed change since they know the change will diminish adviser transitions.

Lax & Neville LLP has nationally represented individuals, securities industry employees and financial services professionals in employment matters and securities-related and commercial litigation, including bonus, severance, labor law and discrimination disputes. Please contact our team of attorneys for a consultation at (212) 696-1999.

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