FINRA has long been concerned with practices used by broker-dealers and their newly registered representatives to convince clients to transfer accounts from the representative’s old firm as well as the fees that are sometimes associated with such transfers. To address these concerns, FINRA proposed Rule 2273 which is intended to establish a requirement for broker-dealers to deliver an educational disclosure to potential clients in connection with recruitment practices and account transfers. The SEC has approved FINRA Rule 2273 and it will be effective on November 11, 2016.
Representatives who begin working for a new broker-dealer often contact former customers hoping to continue their business relationship by transferring their assets to their new broker-dealer, thereby maintaining continuity by staying with the representative. In this situation, customers often feel very comfortable with the representative and would prefer that he/she continue servicing the relationship. However, these same customers may not be aware of other important factors that should be considered when deciding whether to transfer their assets, including costs that the customer may incur.
To provide customers with a more complete picture of the potential implications of a decision to transfer assets, FINRA Rule 2273 requires delivery of a FINRA-created disclosure by the representative’s new broker-dealer that highlights certain considerations customers should consider when contemplating transferring their assets to the new broker-dealer and the impacts of such a transfer on those assets. For your reference, please find below the approved language for FINRA Rule 2273 that will be effective in November.
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.