stockbrokers disclosureFINRA has withdrawn a controversial proposed rule that would have forced stockbrokers to tell their clients why they decided to work at a given brokerage house. That would have included divulging bonuses to transfer and incentive bonuses. If they were in excess of $100,000.00. In late June 2014 FINRA pulled their proposed Rule 2243, which would require brokers to orally disclose their terms of employment at the first client contact and then again in writing within 10 days.

FINRA does plan to file a revised version of the rule. FINRA spokesman George Smaragdis stated,” FINRA continues to believe that recruitment disclosures remain an important investor protection issue and plans to develop a revised proposal and file it with the commission later in the year.” FINRA had received a large amount of feedback since it proposed the rule and wanted time to review the feedback in order to propose a rule that would be more amenable to stockbrokers and brokerage houses.

Generally rules which are proposed are not pulled back after they have been presented to the SEC for approval. Firms were so sure that the rule would be promulgated that they had been using the threat of the new rule to encourage brokers to switch to a new firm before the rule went into effect.

Even with the rule being pulled back FINRA has indicated the basic purpose and principles of the revised rule would be the same. “FINRA continues to believe that former customers would benefit from knowing: that financial incentives may have motivated their representative to change firms; the costs associated with transferring assets to a new firm; and whether moving their assets to the recruiting firm will impact their holdings,” Mr. Smaragdis said.

Specific concerns about the rule, as indicated by the large amount of comment letters on the rule, were that customers would misunderstand the purpose of the disclosures or that the disclosures would make customers reluctant to follow a broker to a new firm. There was also concern that disclosing a pay structure from a previous firm would violate non-solicitation agreements that a given broker may have had in place with his previous firm. “The proposal generated 184 comment letters, and due to the rigid timelines imposed by Dodd-Frank by which the SEC must act on a proposal, FINRA did not believe it could fully address the comments within those time frames,” Smaragdis said.

Large firms such as Merrill Lynch and Morgan Stanley poach salesman from each other by giving bonuses to new employees based on the revenues they generate. This is a situation that FINRA is worried could create an ongoing conflict of interest for the stockbroker as he would strive to reach those bonuses and may be incentivized to disregard the clients’ interests in the process.

Some consumer advocates believe that FINRA’s withdrawal of the proposed rule is due to the pushback that it received from the industry.  These advocates argue that stockbroker disclosure is the cornerstone to a transparent system that allows customers to choose brokers based on all of the facts available.  Without these facts, consumers may be hamstrung in their decision making.

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