July 1, 2016
Get On Board With New FINRA Rule 2273
Before You On-Board Registered Reps
by Myles Blechner, Senior Consultant, NCS Regulatory Compliance
On March 23, 2016, the Securities and Exchange Commission ("SEC") approved Financial Industry Regulatory Authority ("FINRA") FINRA Rule 2273: Educational Communication Related to Recruitment Practices and Account Transfers, which requires member firms who recruit Registered Representatives to deliver an educational communication to all clients being solicited to transfer their accounts. "Order Approving Proposed Rule Change to Adopt FINRA Rule 2273" (Order, SEC, Release No. 34-77430; File No. SR-FINRA-2015-057 /March 23, 2016).
FINRA Rule 2273. Educational Communication Related to Recruitment Practices and Account Transfers
(a) Educational Communication Delivery Requirement
A member that hires or associates with a registered person shall provide to a former customer of the registered person, individually, in paper or electronic form, an educational communication prepared by FINRA when (1) the member, directly or through that registered person, individually contacts the former customer of that registered person to transfer assets or (2) the former customer of that registered person, absent individualized contact, transfers assets to an account assigned, or to be assigned, to the registered person at the member.
(b) Means and Timing of Delivery
(1) A member shall deliver the communication in paragraph (a) at the time of first individualized contact with a former customer by the registered person or the member regarding the former customer transferring assets to the member.
(A) If the contact is in writing, the written communication required in paragraph (a) must accompany the written communication. If the contact is by electronic communication, the member may hyperlink directly to the educational communication.
(B) If the contact is oral, the member or registered person must notify the former customer orally that an educational communication that includes important considerations in deciding whether to transfer assets to the member will be provided not later than three business days after the contact. The educational communication must be sent within three business days from such oral contact or with any other documentation sent to the former customer related to transferring assets to the member, whichever is earlier
(2) If a former customer attempts to transfer assets to an account assigned, or to be assigned, to the registered person at the member, but no individualized contact with the former customer by the registered person or member occurs before the former customer seeks to transfer assets, the member shall deliver the educational communication in paragraph (a) to the former customer with the account transfer approval documentation.
(3) The delivery of the communication required by paragraph (a) shall apply for a period of three months following the date the registered person begins employment or associates with the member.
*** Supplementary Material ***
.01 Definition. For the purpose of this Rule, the term "former customer" shall mean any customer that had a securities account assigned to a registered person at the registered person's previous firm. This term shall not include an account of a non-natural person that meets the definition of an institutional account pursuant to Rule 4512(c).
.02 Express Rejection by Former Customer. The requirement in paragraph (a) shall not apply when the former customer who the member, directly or through that registered person, individually contacts to transfer assets expressly states that he or she is not interested in transferring assets to the member. If the former customer subsequently decides to transfer assets to the member without further individualized contact within the period of three months following the date the registered person begins employment or associates with the member, then the requirements of paragraph (b)(2) shall apply.
In the past, there were two ways of moving accounts over upon recruitment:
- If you were a member of the "broker protocol" and were recruiting from another broker protocol member, you could take limited client information and contact the clients immediately utilizing that information.
- If you were not a protocol firm, it was basically up to you to contact the clients AFTER your resignation, and hope that the resigning firm did not try and keep the clients.
The New Educational Communication
With the advent of new FINRA Rule 2273, the basic mechanics remain the same as before; however, under certain conditions, the member firm that is hiring or associating with the registered representative (the "new firm") is required to send an educational communication created by FINRA to that rep's former customers for a period of three months following the date the registered person begins employment or associates with the member.
As outlined in FINRA Regulatory Notice 16-18:
The Initial Contact
The educational communication focuses on important considerations for a former
customer who is contemplating transferring assets to an account assigned to his or her
former representative at the recruiting firm. The educational communication highlights
the following potential implications of transferring assets to the recruiting firm:
- whether financial incentives the representative receives may create a conflict of interest;
- that some assets may not be directly transferrable to the recruiting firm and as a result the customer may incur costs to liquidate and move those assets or incur account maintenance fees to leave them with his or her current firm;
- potential costs related to transferring assets to the recruiting firm, including differences in the pricing structure and fees the customer's current firm and the recruiting firm impose; and
- differences in products and services between the customer's current firm and the recruiting firm.
The educational communication is intended to prompt a former customer to make further inquiries of the transferring representative (and, if necessary, the customer's current firm), to the extent that the customer considers the information important to his or her decision making.
If the initial contact with the client is in writing, the new firm is required to send the educational communication at the time of the written contact. When this initial written contact occurs electronically, the new firm may hyperlink to the educational communication.
If the initial contact is oral, the new firm or the subject registered representative is required to let the client know that there is an educational communication that will be sent to them in the next three business days or with any asset-transferring documentation, whichever occurs sooner.
In the absence of any individualized contact, when a customer transfers assets to the new firm to be managed by the recruited rep, educational communication still needs to be sent upon receipt of the account transfer approvals.
Express Rejection Exception
The sole exception to the educational communication delivery requirement of new Rule 2273 occurs when a customer is contacted and expressly states that he or she is not interested in transferring assets to the new firm. Even in the case of this "not interested" exception, however, if the client changes their mind and decides to transfer assets within the next three months, the firm still has the requirement to send.
As with many new rules, there are some gray areas, like when the client transfers assets to the new firm but does not designate that the assets be managed by the new representative; and I am sure that this will lead to questions by FINRA and hopefully more clarification as we move forward. Some key points to remember about the new rule when recruiting:
- For three months after recruiting, you need to ensure that the communication is sent to any new customers, either along with the initial communication and paperwork (written protocol), or within three days of speaking to the new client (oral protocol)
- A best practice is designating a central person or group that is responsible for sending the communications out, like an onboarding or operations team, so that appropriate records can be maintained. Client record retention is a key point in examinations, and maintaining records of delivery, especially in regulations with a specific delivery requirement and time frame, are important factors.
- It is likely that this is something that will be reviewed in upcoming regulatory examinations.
ABOUT THE AUTHOR
NCS Regulatory Compliance
1345 Avenue of the Americas, 2nd Floor, New York, NY 10105
Myles Blechner has been in the Financial Services Industry since 1994 and has served as a Registered Representative, Trading Desk Manager, Operations Manager, Compliance Manager, and Broker Dealer and Investment Adviser Chief Compliance officer. Most recently, Myles has served as Chief Compliance Officer for Lebenthal and Co., LLC, a New York-based Broker Dealer, Lebenthal Wealth Advisors, and Lebenthal Asset Management, affiliated Investment Advisers, and over the course of his career, has worked at Paine Webber/UBS, Dreyfus Service Corporation, Laidlaw and Co (UK) Ltd, irst Empire Securities, and Schonfeld Securities.
Myles attends and has spoken at industry conferences and events and maintains a strong rapport with the regulatory bodies. His approach to compliance is to create a culture of compliance within the firm, in which sales and trading sees compliance as a business partner. Myles experience includes broker dealer and investment adviser compliance programs, including policies and procedures, codes of ethics, conflicts of interest, annual compliance meetings and training, and regulatory filings. Myles holds Series 4, 7, 9, 10, 24, 53, 55, 63, 79, 99, NYSE Series 14 and the NY State Life, Accident, and Health Insurance Licenses.
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