May 26, 2020

SEC Finally Approves FINRA's Watered-Down Recruitment Broker Bonus Disclosure Rule

Lost in the commotion surrounding the Department of Labor's new fiduciary rule was the Securities and Exchange Commission's approval of FINRA's recruitment bonus disclosure rule, which requires action by broker dealers when recruiting new representatives.

The new rule may prove especially timely as seven- and eight-year retention agreements and recruiting contracts entered into during the financial crisis of 2008-2009 expire and recruiting activity heats up. While not as onerous as the originally proposed rule, the new FINRA guidelines still require action by broker dealers following the recruitment of new representatives. For example, recruiting firms will have to advise their brokers on how to draft disclosures and answer consumer questions.

Registered representatives are often motivated to join a new firm through a combination of financial incentives, which may include large recruitment bonuses and additional compensation based on the number of customers and amount of assets transferred to the new firm.

As originally proposed, FINRA's rule would have imposed an affirmative duty on the representative and his or her new firm to disclose information about compensation and other issues to customers who elected to transfer to the new firm. However, FINRA's rule, as approved, requires the representative to provide an "educational communication" suggesting questions the customer may want to ask his or her representative, placing the burden of discovery on the customer.

Differences in the Approved Version

FINRA proposed the disclosure rule because it believed customers would benefit from knowing the material conflicts that arise from paying a registered representative incentives to change firms. The FINRA rule, as originally filed with the SEC in 2014, would have required representatives paid more than $100,000 in incentive compensation – including upfront or backend bonuses, loans, accelerated payouts, transition assistance and similar arrangements – to provide "clear and prominent" disclosure of information with respect to the timing, amount and nature of the enhanced compensation arrangement to any customer asked to move with the broker within one year. The proposed rule also required firms to report to FINRA the details of the recruitment incentives.

Not surprisingly, the financial services industry strongly opposed the new disclosures. In the face of that opposition, FINRA withdrew its original proposal in 2014 and replaced it with the rule that was eventually adopted. The revised rule eliminates the representative's duty to disclose the terms of his or her incentive compensation to the customer, and instead requires the customer be provided with an "educational communication" that highlights the potential implications of transferring assets to the recruiting firm and suggests questions the customer may want to ask to make an informed decision. The reporting requirement to FINRA was also eliminated.

© Polsinelli PC, Polsinelli LLP in California

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About this Author

Paul R. Wood, Polsinelli, customer fraud lawyer, raiding and recruitment attorney
Shareholder

Paul Wood has tried more than 50 cases in federal and state courts and before arbitration panels in 17 states. He thrives on securing positive results for his clients and, over the course of his more than 30 years of practice, clients have come to expect these satisfying outcomes. 

He has represented securities broker/dealers and other financial services firms before FINRA and in court on a wide range of claims, including customer complaints, fraud, raiding and recruitment, and protocol for broker recruiting compliance. His deep knowledge of the...

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Thomas Wagner, Litigation, Financial Services, Polsinelli Law FIrm
Associate

Tom is an associate with substantial litigation experience in the financial services industry. He resolves disputes by listening to clients and knowing how litigation affects their business. Tom’s legal skills, industry knowledge, and understanding of client goals help him obtain cost-effective resolutions to complex legal problems. 
Tom has successfully resolved:

  • Trade-secret disputes
  • Unfair competition cases
  • Breach of contract cases
  • Claims arising under federal and state consumer protection statutes
  • Business fraud and business divorce matters.

In addition to representing financial services clients in litigation and arbitration matters, Tom has represented clients in enforcement actions by the Federal Trade Commission and has counseled trade groups on antitrust compliance. 

720.931.8162