[Federal Register Volume 81, Number 60 (Tuesday, March 29, 2016)]
[Notices]
[Pages 17513-17520]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-06995]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-77430; File No. SR-FINRA-2015-057]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving Proposed Rule Change to Adopt FINRA
Rule 2273 (Educational Communication Related to Recruitment Practices
and Account Transfers)
March 23, 2016.
I. Introduction
On December 16, 2015, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission''), pursuant to section 19(b)(1) of the Securities
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to adopt FINRA Rule 2273, which
would establish an obligation for a member to deliver an educational
communication in connection with member recruitment practices and
account transfers.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in the Federal
Register on December 30, 2015.\3\ The Commission received twelve
comment letters on the proposal.\4\ On February 4, 2016, FINRA extended
the time period for Commission action on the proposed rule change until
March 29, 2016. On March 17, 2016, FINRA responded to
[[Page 17514]]
the comments.\5\ The proposed rule change is unchanged from the
original proposal. This order approves the proposed rule change. The
text of the proposed rule change is available on FINRA's Web site at
http://www.finra.org, at the principal office of FINRA, on the
Commission's Web site at http://www.sec.gov, and at the Commission's
Public Reference Room.
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\3\ See Notice of Filing of a Proposed Rule Change to Adopt
FINRA Rule 2273 (Educational Communication Related to Recruitment
Practices and Account Transfers), Exchange Act Rel. No. 76757
(December 23, 2015), 80 FR 81590 (December 30, 2015) (``Notice'').
\4\ Comment letters were submitted by Georgia State University
College of Law Investor Advocacy Clinic (``GSU''); Commonwealth
Financial Network (``Commonwealth''); Securities Industry and
Financial Markets Association (``SIFMA''); Financial Services
Institute (``FSI''); Public Investors Arbitration Bar Association
(``PIABA''); Wells Fargo Advisors (``Wells Fargo''); The Committee
of Annuity Insurers (``Committee of Annuity Insurers''); Lincoln
Financial Network (``Lincoln''); LPL Financial (``LPL''); Raymond
James Financial Services (``RJFS''); Raymond James & Associates
(``RJA''); and HD Vest Investment Services (``HD Vest'').
\5\ Letter from Jeanette Wingler, Assistant General Counsel,
FINRA, to Brent J. Fields, Secretary, Commission, dated March 17,
2016.
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II. Description of the Proposed Rule Change
Background
FINRA is concerned that representatives who switch their member
firm often contact former customers and emphasize the benefits the
former customers would experience by following the representative and
transferring their assets to the firm that recruited the registered
representative (``recruiting firm'') and maintaining their relationship
with the representative. In this situation, former customers'
confidence in and prior experience with the representative may be one
of the customers' most important considerations in determining whether
to transfer assets to the recruiting firm. As stated in the Notice,
FINRA is concerned that former customers may not be aware of other
important factors to consider in making a decision whether to transfer
assets to the recruiting firm, including direct costs that may be
incurred. Therefore, to provide former customers with a more complete
picture of the potential implications of a decision to transfer assets,
the proposed rule change would require delivery of an educational
communication by the recruiting firm that highlights key considerations
in transferring assets to the recruiting firm, and the direct and
indirect impacts of such a transfer on those assets.
As stated in the Notice, FINRA believes that former customers would
benefit from receiving a concise, plain-English document that
highlights the potential implications of transferring assets. The
proposed educational communication is intended to encourage former
customers 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.
Educational Communication
The proposed rule change would require a member that hires or
associates with a registered representative to provide to a former
customer of the representative, individually, in paper or electronic
form, an educational communication prepared by FINRA. The proposed rule
change would require delivery of the educational communication when:
(1) The member, directly or through a representative, individually
contacts a former customer of that representative to transfer assets;
or (2) a former customer of the representative, absent individual
contact, transfers assets to an account assigned, or to be assigned, to
the representative at the member.\6\
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\6\ See proposed FINRA Rule 2273(a).
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The proposed rule change would define a ``former customer'' as any
customer that had a securities account assigned to a registered person
at the representative's previous firm. The term ``former customer''
would not include a customer account that meets the definition of an
``institutional account'' pursuant to FINRA Rule 4512(c); provided,
however, accounts held by a natural person would not qualify for the
institutional account exception.\7\
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\7\ See proposed FINRA Rule 2273.01 (Definition). FINRA Rule
4512(c) defines the term institutional account to mean the account
of: (1) A bank, savings and loan association, insurance company, or
registered investment company; (2) an investment adviser registered
either with the SEC under Section 203 of the Investment Advisers Act
of 1940 or with a state securities commission (or any agency or
office performing like functions); or (3) any other entity (whether
a natural person, corporation, partnership, trust, or otherwise)
with total assets of at least $50 million.
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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 would highlight the following
potential implications of transferring assets to the recruiting firm:
(1) Whether financial incentives received by the representative may
create a conflict of interest; (2) 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 account maintenance
fees to leave them with his or her current firm; (3) potential costs
related to transferring assets to the recruiting firm, including
differences in the pricing structure and fees imposed by the customer's
current firm and the recruiting firm; and (4) 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 recruiting firm (and, if necessary, the customer's current firm),
to the extent that the customer considers the information important to
his or her decision making.
Requirement To Deliver Educational Communication
As stated in the Notice, FINRA believes that a broad range of
communications by a recruiting firm or its registered representative
would constitute individualized contact that would trigger the delivery
requirement under the proposal.\8\ These communications may include,
but are not limited to, oral or written communications by the
transferring representative: (1) Informing the former customer that he
or she is now associated with the recruiting firm, which would include
customer communications permitted under the Protocol for Broker
Recruiting (``Protocol''); \9\ (2) suggesting that the former customer
consider transferring his or her assets or account to the recruiting
firm; (3) informing the former customer that the recruiting firm may
offer better or different products or services; or (4) discussing with
the former customer the fee or pricing structure of the recruiting
firm.
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\8\ See Notice, supra note 3, 80 FR at 81591.
\9\ The Protocol was created in 2004 and permits departing
representatives to take certain limited customer information with
them to a new firm, and solicit those customers at the new firm,
without the fear of legal action by their former employer. The
Protocol provides that representatives of firms that have signed the
Protocol can take client names, addresses, phone numbers, email
addresses, and account title information when they change firms,
provided they leave a copy of this information, including account
numbers, with their branch manager when they resign.
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Furthermore, as stated in the Notice, FINRA would consider oral or
written communications to a group of former customers to similarly
trigger the requirement to deliver the educational communication under
the proposed rule change.\10\ These types of oral or written
communications by a member, directly or through the representative, to
a group of former customers may include, but are not limited to: (1)
Mass mailing of information; (2) sending copies of information via
email; or (3) automated phone calls or voicemails.
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\10\ See Notice, supra note 3, 80 FR at 81591.
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Timing and Means of Delivery of Educational Communication
The proposed rule change would require a member to deliver the
educational communication at the time of the first individualized
contact with a former customer by the member,
[[Page 17515]]
directly or through the representative, regarding the former customer
transferring assets to the member.\11\ If such contact is in writing,
the proposed rule change would require the educational communication to
accompany the written communication. If the contact is by electronic
communication, the proposed rule change would permit the member to
hyperlink directly to the educational communication.\12\
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\11\ See proposed FINRA Rule 2273(b)(1).
\12\ See proposed FINRA Rule 2273(b)(1)(A).
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If the first individualized contact with the former customer is
oral, the proposed rule change would require the member or
representative to 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 proposed rule change
would require the educational communication 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.\13\
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\13\ See proposed FINRA Rule 2273(b)(1)(B).
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If the former customer seeks to transfer assets to an account
assigned, or to be assigned, to the representative at the member, but
no individualized contact with the former customer by the
representative or member occurs before the former customer seeks to
transfer assets, the proposed rule change would mandate that the member
deliver the educational communication to the former customer with the
account transfer approval documentation.\14\ The educational
communication requirement in the proposed rule change would apply for a
period of three months following the date that the representative
begins employment or associates with the member.\15\
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\14\ See proposed FINRA Rule 2273(b)(2).
\15\ See proposed FINRA Rule 2273(b)(3).
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Pursuant to the proposed rule change, the educational communication
requirement would not apply when the former customer 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 that the representative begins
employment or associates with the member, then the educational
communication would be required to be provided with the account
transfer approval documentation.\16\
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\16\ See proposed FINRA Rule 2273.02 (Express Rejection by
Former Customer).
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Format of Educational Communication
To facilitate uniform communication under the proposed rule change
and to assist members in providing the proposed communication to former
customers of a representative, the proposed rule change would require a
member to deliver the proposed educational communication prepared by
FINRA to the former customer, individually, in paper or electronic
form.\17\ The proposed rule change would require members to provide the
FINRA-created communication and would not permit members to use an
alternative format.\18\ As stated in the Notice, FINRA believes that
the FINRA-created uniform educational communication will allow members
to provide the required communication at a relatively low cost and
without significant administrative burdens.\19\
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\17\ See proposed FINRA Rule 2273(a) and Exhibit 3.
\18\ See proposed FINRA Rule 2273(a).
\19\ See Notice, supra note 3, 80 FR at 81592.
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III. Summary of Comment Letters and FINRA's Response
Overall Proposal
Two commenters stated that the current proposal is an improvement
from the previous version of the proposal.\20\ Eight additional
commenters expressed support for a regulatory effort to provide
investors with meaningful information upon which to base a decision to
transfer assets but did not support all aspects of the current
proposal.\21\ Two commenters opposed the current proposal and instead
supported a return to the requirement in a previous version of the
proposal to provide specific information about any financial incentives
received by the representative and costs associated with the former
customer transferring assets.\22\ Alternatively, another commenter
suggested requiring the member to provide written answers to the
questions included in the educational communication if the customer so
requests.\23\ One commenter maintained that the proposal is not
justified by its costs because there are no systemic issues with the
current account transfer process, which also includes some
disclosure.\24\
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\20\ Lincoln and FSI.
\21\ SIFMA, LPL, Wells Fargo, RJFS, RJFA, Commonwealth, and HD
Vest.
\22\ PIABA and GSU.
\23\ GSU.
\24\ HD Vest.
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In its response to commenters, FINRA states that it believes that
the proposal will promote investor protection by highlighting important
conflict and cost considerations of transferring assets and encouraging
customers to make further inquiries to reach an informed decision about
whether to transfer assets to the recruiting firm. Furthermore, FINRA's
response to commenters notes that, as explained in more detail in the
Notice, FINRA considered several alternatives to the proposal to help
ensure that it is narrowly tailored to achieve its purposes without
imposing unnecessary costs and burdens on members.\25\ FINRA believes
that the proposed rule is an effective and efficient alternative to the
previous proposal. While educating former customers about important
considerations to make an informed decision whether to transfer assets
to the recruiting firm, FINRA believes the proposed rule eliminates or
reduces the privacy and operational concerns raised regarding the
previous proposal (e.g., by removing the requirement to disclose to
former customers the magnitude of recruitment compensation paid to a
transferring representative). FINRA notes that the dialogue prompted by
the educational communication could include a discussion with the
transferring representative about more specifics related to the
incentives and costs associated with the transfer.
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\25\ See Notice, supra note 3, 80 FR at 81593.
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FINRA further states in its response to commenters that it believes
that former customers would benefit from receiving a concise, plain-
English document that highlights the potential implications of
transferring assets, such as conflict and cost considerations, several
of which are not disclosed or otherwise brought to the attention of a
customer as part of the account transfer approval documentation.
Requirement To Deliver the Educational Communication
One commenter supported the proposal's delivery requirements as
providing a ``clear and straightforward standard.'' \26\ The commenter
further stated that with the ``straightforward standard, firms will be
able to easily create and implement policies, procedures and systems to
comply with the rule.'' \27\ Some commenters, on the other hand, stated
that the triggers for delivering the educational
[[Page 17516]]
communication would be complex and difficult for members to implement
as members would be dependent on reporting by representatives to
members with respect to each individualized contact with a former
customer.\28\ Some commenters commented that compliance with the
proposed rule would require significant time and effort on the part of
members and would result in significant costs.\29\
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\26\ FSI.
\27\ FSI.
\28\ Commonwealth and HD Vest.
\29\ Commonwealth and HD Vest.
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In its response to commenters, FINRA states that it does not
believe that the burdens associated with tracking whether there has
been individualized contact with a former customer are unreasonable
relative to the value in providing the educational communication to
such customers. Moreover, FINRA's response to commenters notes that, as
FINRA stated in the Notice, members already are obligated to supervise
representatives' communications with existing or prospective customers
and have flexibility to design their supervisory systems to track
communications soliciting new business from former customers of
representatives.\30\ As such, FINRA does not believe the proposed rule
change imposes substantially new or burdensome obligations by requiring
firms to establish policies and procedures reasonably designed to
ensure that the educational communication is timely delivered to former
customers.
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\30\ See Notice, supra note 3, 80 FR at 81595.
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One commenter stated that a member cannot supervise communications
between representatives and former customers before such customers
establish accounts at the member.\31\ In its response to commenters,
FINRA states that it disagrees. If a representative is associated with
or employed by a member, FINRA notes that the member is required to
supervise the representative's conduct consistent with FINRA rules,
including FINRA Rule 2210 (Communications with the Public). FINRA notes
that the standards applicable to retail communications and
correspondence under Rule 2210, as well as the requirements to
supervise correspondence pursuant to FINRA Rule 3110 (Supervision), are
not limited to communications with current customers. FINRA states that
therefore, the fact that a former customer or any other individual has
not yet established an account at the member does not obviate those
supervision requirements.
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\31\ HD Vest.
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Individualized Contact
Some commenters requested additional guidance as to what
individualized contact with a former customer would trigger the
requirement to deliver the educational communication.\32\ FINRA's
response to commenters notes that, as stated in the Notice, it intends
for a broad range of oral or written communications by a recruiting
firm, directly or through a representative, to constitute
individualized contact with a former customer to transfer assets and
therefore trigger the delivery of the educational communication under
the proposed rule.\33\ FINRA notes that the Notice provides several
examples of such individualized contacts, including a written or oral
communication informing the customer that the representative is now
associated with the recruiting firm.\34\ In its response to commenters,
FINRA states that it will consider giving additional guidance, as
appropriate, where questions about specific types of individualized
contact arise.
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\32\ SIFMA, HD Vest, RJA, and RJFS.
\33\ See Notice, supra note 3, 80 FR at 81591.
\34\ See Notice, supra note 3, 80 FR at 81591.
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The proposed rule change would require delivery of the educational
communication, absent individualized contact, with account transfer
approval documentation. One commenter supported requiring delivery of
the educational communication to a former customer, where there is not
individualized contact, before the transmittal of the account transfer
approval documentation.\35\ FINRA's response to commenters notes that
to lessen any associated operational and supervisory burdens of
implementing the proposed rule, FINRA has not proposed requiring that
the educational communication be provided to former customers before
the account transfer approval documentation where there is not
individualized contact.
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\35\ GSU.
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One commenter expressed the view that the different delivery
requirements based on whether there was individualized contact would be
unworkable as members could not reasonably determine that the receipt
of account paperwork was the result of no contact between the
registered person and the former customer.\36\
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\36\ Commonwealth.
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FINRA's response to commenters states that, as set forth in the
Notice, FINRA believes that a representative reasonably should know
whether an individual had an account assigned to him or her at the
representative's prior firm and whether the representative has
individually contacted the former customer regarding transferring
assets to the recruiting firm.\37\ FINRA also states in its response to
commenters that it believes that a reasonably designed supervisory
system would require the representative to communicate with a member
whether he or she had individualized contact with a former customer. As
such, FINRA does not believe it is unworkable to distinguish account
transfers that resulted absent individualized contact.
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\37\ See Notice, supra note 3, 80 FR at 81594.
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Some commenters requested clarification regarding whether the
requirements of the proposed rule would be triggered by ``unanticipated
communications'' between a representative and a former customer.\38\ In
its response to commenters, FINRA explains that the proposed rule would
apply where a member, directly or through a representative,
individually contacts a former customer of that representative to
transfer assets or where a former customer transfers assets to an
account assigned to the representative at the member absent
individualized contact. As such, FINRA notes that whether contact that
occurs with a former customer is planned or serendipitous is not
dispositive; rather, it is the substance of the communication that
determines if the delivery requirement is triggered. Thus, FINRA
explains that unanticipated contact with a former customer (e.g., at a
sporting or social event) without a communication from the
representative to the former customer that would constitute
individualized contact, as described above, about transferring assets
would not trigger the requirements of the proposed rule. In its
response to commenters FINRA notes that, if, for example, the
representative took the opportunity of the situation to inform the
former customer of his or her move to a new firm and the merits of
transferring assets to that new firm, the delivery requirement would be
triggered.
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\38\ Lincoln, LPL, RJA, and RJFS.
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Timing and Delivery of Educational Communication
Several commenters expressed concern with the means and timing of
the delivery requirement. Some commenters contended that the
requirement to deliver the educational communication within three
business days after oral contact by a representative with a former
customer would present operational and supervisory challenges, such as
training
[[Page 17517]]
representatives on the scope and practical implications of the
requirement, relying on representatives to timely report contacts to
the member, and preparing the mailing to former customers within the
required period of time.\39\ One commenter suggested eliminating the
requirement to deliver the educational communication within three
business days after oral contact and instead require written delivery
in all circumstances.\40\ Along with that commenter, some commenters
suggested that the requirement to deliver the educational communication
be integrated into an existing process, such as including the
communication with the account transfer approval documentation, so as
to make implementation of the requirement more cost effective and
efficient for members.\41\ Alternatively, one commenter suggested
lengthening the period to deliver the educational communication to 10
business days.\42\
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\39\ SIFMA, Committee of Annuity Insurers, Lincoln, RJA, RJFS,
Commonwealth, and HD Vest.
\40\ Wells Fargo.
\41\ Wells Fargo, SIFMA, Lincoln, Committee of Annuity Insurers,
RJA, RJFS, Commonwealth, and HD Vest.
\42\ HD Vest.
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One commenter requested additional analysis and justification for
FINRA's belief that delivering the communication at or prior to account
opening would be too late because customers typically have already made
the decision to transfer assets by that point in the process.\43\
Another commenter stated that requiring the educational communication
to accompany the first written communication would mean that any
efforts taken by a member to review written communications that have
already occurred between a representative and a former customer would
be too late to prevent a rule violation.\44\
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\43\ SIFMA.
\44\ Commonwealth.
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FINRA's response to commenters notes that with respect to delivery
after oral contact, as stated in the Notice, FINRA believes that the
three-business-day period gives a representative sufficient time to
inform the recruiting firm of the former customers who have been
contacted and, in turn, for the recruiting firm to send the educational
communication to those former customers.\45\ Furthermore, as stated in
its response to commenters, FINRA understands that members frequently
send account opening documentation within that time frame to customers
that have indicated an interest in opening an account. FINRA also notes
that it sought data and evidence around the associated costs of the
proposed rule and that commenters did not provide specific data or
analysis to support their contention that the delivery requirements as
proposed would present considerable additional costs for recruiting
firms. Accordingly, FINRA does not propose to change the requirement in
the proposed rule.
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\45\ See Notice, supra note 3, 80 FR at 81595-81596.
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As explained in its response to commenters and in more detail in
the Notice, FINRA believes that to be effective, the proposed
educational communication must be accessible to the former customer at
or shortly after the time the first individualized contact is made by
the recruiting firm or the representative.\46\ In its response to
commenters, FINRA notes that the delivery requirement will allow the
customer the time needed to have discussions with the registered
representative and the customer's current firm about the implications
of transferring assets in close proximity to receipt of any information
the representative may have provided to encourage a transfer and will
facilitate an informed and reasoned decision. FINRA further notes that
some commenters to its Regulatory Notice 15-19,\47\ where FINRA first
proposed the delivery requirements, noted the benefits of timely
delivery. FINRA points out that two commenters to Regulatory Notice 15-
19 supported requiring delivery of the educational communication prior
to the time that a former customer decides to transfer assets to the
recruiting firm to ensure that the former customer has sufficient time
to consider and respond to the information in the communication.\48\
FINRA also notes that another broker-dealer commenter that favored
contemporaneous delivery of the educational communication at the time
of first individualized contact stated that permitting three business
days following an oral communication was too late as many customers
will make a determination to transfer assets prior to receiving the
communication.\49\
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\46\ See Notice, supra note 3, 80 FR at 81595.
\47\ See FINRA Requests Comment on a Proposed Rule to Require
Delivery of an Educational Communication to Customers of a
Transferring Representative, Regulatory Notice 15-19, at 4 (May
2015) (``Notice 15-19'').
\48\ See Letter from Jeffrey T. Brown, Senior Vice President and
Head of Legislative and Regulatory Affairs, Charles Schwab & Co.,
Inc., to Marcia E. Asquith, Senior Vice President and Corporate
Secretary of FINRA, dated July 13, 2015; and letter from Joseph C.
Peiffer, President, Public Investors Arbitration Bar Association, to
Marcia E. Asquith, Senior Vice President and Corporate Secretary of
FINRA, dated July 13, 2015.
\49\ See Letter from Jesse Hill, Principal--Government and
Regulatory Relations, Edward Jones, to Marcia E. Asquith, Senior
Vice President and Corporate Secretary of FINRA, dated July 14,
2015.
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In its response to commenters, FINRA states that it agrees with the
commenters that providing the communication at the time of account
opening would be less effective than the proposed approach as customers
have already made the decision to transfer assets at the time the
customer has initiated the account opening process. Similarly, FINRA
states that it believes a requirement to permit delivery of the
educational communication at any time prior to account opening would
allow members to wait until the customer agrees to transfer assets to
the member or until shortly before the account is opened before
delivering the educational communication.
Finally, with respect to one comment that post-use review of
communications cannot prevent a violation of the requirement that the
educational communication accompany written first individualized
contact,\50\ FINRA notes in its response to commenters that its rules
provide members' some flexibility with respect to review of
representatives' communications with customers and require review of
only some communications prior to first use or distribution.\51\
Consistent with those rules, FINRA states that a member would not
necessarily need to implement prior use approval of every written
communication to a former customer to have policies and procedures
reasonably designed to achieve compliance with the proposed rule
change.
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\50\ Commonwealth.
\51\ FINRA states, for example, that correspondence with
customers is subject to the supervision and review requirements of
FINRA Rules 3110(b) and 3110.06 through .09. While review of all
institutional communications is not required prior to first use or
distribution, FINRA states that FINRA Rule 2210(b)(1)(A) requires
that an appropriately qualified registered principal of the member
must approve each retail communication before the earlier of its use
or filing with FINRA's Advertising Regulation Department.
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Duration of Delivery Requirement
Under the proposed rule change, the delivery of the educational
communication would apply for three months following the date the
representative begins employment or associates with the member. One
commenter supported shortening the applicable time period from six
months as proposed in Notice 15-19 \52\ to three
[[Page 17518]]
months as proposed in the Notice.\53\ On the other hand, two commenters
supported extending the period to one year.\54\
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\52\ See Notice 15-19, supra note 47, at 4.
\53\ SIFMA.
\54\ PIABA and GSU.
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In its response to commenters, FINRA states that it believes the
three-month period strikes an appropriate balance between achieving the
regulatory objective of an informed decision by former customers most
likely to consider transferring assets as the result of their
representative's move to a new firm, while lessening the economic
impacts on members.
Efforts by Current Firm To Retain Customers
One commenter favored requiring a customer's current firm to
deliver the educational communication to the customer and including
questions in the communication that a customer may wish to consider if
the current firm is soliciting a customer to keep his or her account
with the firm.\55\ Another commenter also supported including specific
disclosure about the incentives that employees of the current firm may
receive for retaining the customer.\56\
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\55\ Lincoln.
\56\ PIABA.
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FINRA's response to commenters states that, as noted in the Notice,
FINRA is focused on providing customers impactful information to
consider when deciding whether to transfer assets to a representative's
new firm, where cost and portability issues are most likely to arise
and where some potential conflicts (e.g., financial incentives to
attract new assets) are more pronounced.\57\ In its response to
commenters, FINRA states that while the proposed rule change would not
require the current firm to provide the educational communication to a
customer, the proposed educational communication does note that ``some
firms pay financial incentives to retain brokers or customers.'' FINRA
further states that it believes that the communication will prompt
customers to consider the implications of both staying and moving when
urged to do so by representatives of either firm. Furthermore, FINRA
notes that requiring the current firm to also provide the educational
communication to a customer whose representative has transferred to a
new firm would result in the customer receiving multiple copies of the
same communication.
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\57\ See Notice, supra note 3, 80 FR at 81598.
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Contractual and Legal Considerations
Three commenters suggested including a statement in the educational
communication that the communication is not intended as a solicitation
or to encourage or discourage the transfer of customer assets.\58\ Two
commenters asked FINRA to amend the proposed rule to include a
provision stating that compliance with the rule is not intended to
interfere with members' obligations under Regulation S-P, the Protocol
or other contractual non-solicitation obligations.\59\
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\58\ SIFMA, HD Vest, and LPL.
\59\ RJA and RJFS.
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In its response to commenters, and as noted in the Notice in
response to earlier comments of the same nature, FINRA states that it
does not intend the proposed rule to impact any contractual agreement
between a representative and his or her former firm or new firm and
does not require members to disclose information in a manner
inconsistent with Regulation S-P.\60\ FINRA notes that the proposed
rule change assumes that recruiting firms and representatives will act
in accordance with the contractual obligations established in
employment contracts, state law, and, if applicable, the Protocol.
Furthermore, in its response to commenters, FINRA states that it does
not intend for the provision of the educational communication to have
any relevance to a determination of whether a representative
impermissibly solicited a former customer in breach of a contractual
obligation. FINRA does not believe it necessary or appropriate to
include any statement regarding solicitation in the educational
communication, which by itself and its own terms cannot reasonably be
considered to encourage or discourage the transfer of assets.
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\60\ See Notice, supra note 3, 80 FR at 81599.
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One commenter stated that an exception from Regulation S-P was
needed to permit transferring representatives to take limited customer
information with them to their new firms in order to comply with the
requirements of the proposed rule.\61\ In its response to commenters,
FINRA disagrees. FINRA states that the proposed rule does not require
contact with any former customers, but rather, only requires delivering
the educational communication once a transferring representative or the
recruiting firm makes individualized contact with a former customer
about transferring assets to an account assigned to the representative
at the member. FINRA states that it believes that in most instances, a
former customer will not be contacted in the first instance unless the
representative or recruiting firm already has the customer's contact
information. In those rare circumstances where individualized contact
that triggers the requirements of the rule happens by chance or without
contact information, FINRA believes the representative or recruiting
firm can ask the customer for the contact information needed to deliver
the educational communication.
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\61\ HD Vest.
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Scope of Proposal
Customers
Two commenters supported expanding the requirement to apply to all
customers of a representative, not just a representative's former
customers.\62\ One commenter recommended that the proposed rule
incorporate the definition of institutional account in FINRA Rule
4512(c) (Customer Account Information) without excluding accounts held
by any natural person.\63\
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\62\ PIABA and GSU.
\63\ SIFMA.
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In its response to commenters, FINRA declines to revise the
definition of ``former customer'' or to extend the requirement to apply
to other customers of a representative. Furthermore, FINRA's response
to commenters notes that, as stated in the Notice, FINRA believes that
former customers that a member or representative individually contacts
to transfer assets to a new firm are most impacted in recruitment
situations because they have already developed a relationship with the
representative and because their assets may be both the basis for the
representative's recruitment compensation and subject to potential
costs and changes if the customer decides to move those assets to the
recruiting firm.\64\ In its response to commenters, FINRA states that
it believes that it is appropriate to include natural persons who would
be considered institutional accounts under Rule 4512(c), as these
individuals may not be aware of the implications of transferring
assets.
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\64\ See Notice, supra note 3, 80 FR at 81600.
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Two commenters supported requiring customer affirmation of the
receipt of the educational communication.\65\ FINRA's response to
commenters explains that, as noted in more detail in the Notice, while
some firms may elect to include a customer affirmation requirement as
part of their supervisory controls in implementing the proposed rule
change, FINRA believes the requirements of the rule will ensure that
[[Page 17519]]
former customers receive and have an opportunity to review the
information in the proposed educational communication before they
decide to transfer assets to a recruiting firm.\66\ In addition, FINRA
states that it does not want to impose any additional obligations that
may impede the timely transfer of customer assets between members.
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\65\ PIABA and GSU.
\66\ See Notice, supra note 3, 80 FR at 81597.
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Members and Registered Representatives
One commenter requested clarification regarding whether the
proposed rule would apply to representatives who are employed by or
associated with a member in a non-financial advisor role (e.g.,
operations or non-producing branch/complex managers), but who may have
customer accounts assigned to them that are incidental to their primary
job function.\67\ FINRA states in its response to commenters that to
the extent a representative has accounts assigned to him or her at the
new firm, FINRA sees no reason to distinguish those accounts based on
the representative's primary function, as the implications for the
former customers are the same. Accordingly, FINRA believes that because
an account assigned to a representative may be incidental to a
representative's primary job function should not obviate the
requirements of the proposed rule.
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\67\ SIFMA.
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Two commenters requested clarification on whether the proposed rule
would apply when a representative transfers between broker-dealer
subsidiaries of the same holding company.\68\ In its response to
commenters, FINRA states that it believes that the facts and
circumstances of such representative transfers may vary. FINRA will
consider giving additional guidance, as appropriate, where specific
questions arise regarding representative transfers between broker-
dealer subsidiaries of the same holding company.
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\68\ RJA and RJFS.
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In the Notice, FINRA interpreted the proposed rule change as not
applying to circumstances where a customer's account is proposed to be
transferred to a new member via bulk transfer or due to a change of
broker-dealer of record.\69\ Four commenters supported the
clarification provided in the Notice in these contexts.\70\ One
commenter stated that the interpretation that the proposed rule would
not apply should be extended to include all changes in networking
arrangements between a financial institution and a broker-dealer, and
not just those for which bulk transfers are used.\71\
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\69\ See Notice, supra note 3, 80 FR at 81596.
\70\ SIFMA, FSI, Committee of Annuity Insurers, and LPL.
\71\ LPL.
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In its response to commenters, FINRA states that it believes that
the considerations set forth in the educational communication do not
have the same application in the context of a bulk transfer as they do
when a customer has a viable choice between staying at his or her
current firm with the same level of products and services or
transferring assets to the recruiting firm, with the attendant impacts.
Because the facts and circumstances of changes in networking
arrangements between a financial institution and a broker-dealer
outside the bulk transfer context may vary, FINRA will consider giving
additional guidance, as appropriate, where specific questions arise for
changes in networking arrangements outside the bulk transfer context.
In the Notice, FINRA stated that the proposed rule change would
apply to a registered person dually registered as an investment adviser
and broker-dealer at the former firm who associates with a member firm
in both an investment advisory and broker-dealer capacity.\72\ One
commenter supported the clarification provided in the Notice regarding
the treatment of dual hatted persons.\73\ Another commenter noted that
there may be instances where dually registered representatives have
former clients with only investment advisory accounts at the former
firm and requested clarification on whether the proposed rule would
apply to such former customers.\74\
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\72\ See Notice, supra note 3, 80 FR at 81601.
\73\ SIFMA.
\74\ LPL.
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In its response to commenters, FINRA notes that it proposed to
define ``former customer'' to include any customer that had a
securities account assigned to a representative at the representative's
previous firm, excluding a customer account that meets the definition
of an institutional account pursuant to Rule 4512(c) other than
accounts held by any natural person. FINRA would interpret this
definition to include an individual who had only an investment advisory
account at the representative's old firm. FINRA notes that the proposed
rule would not apply if the registered person transferred to a non-
member firm or associated with a member firm only as an investment
adviser representative.
Terminology
Two commenters supported replacing the term ``broker'' in the
educational communication with the term ``registered representative.''
\75\
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\75\ RJFS, RJFA.
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In its response to commenters, FINRA declines to make the requested
change as it believes ``broker'' is a commonly understood generic term
for a registered representative. It is used in the proposed educational
communication for readability and brevity purposes, which FINRA
believes is important to encourage customers to read the document.
Implementation Date
One commenter requested that the implementation date of the
proposed rule be at least 180 days from the date that the proposed rule
is finalized so as to provide members with sufficient time to design,
adopt, and implement appropriate policies and procedures to achieve
compliance with the rule.\76\
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\76\ SIFMA.
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In its response to commenters, FINRA states that it will consider
the need to develop compliance systems and make operational changes in
establishing an effective date for the proposed rule.
IV. Discussion and Commission Findings
After carefully considering the proposal, the comments submitted,
and FINRA's response to the comments, the Commission finds that the
proposed rule change is consistent with the requirements of the
Exchange Act and rules and regulations thereunder applicable to a
national securities association.\77\ In particular, the Commission
finds that the proposed rule change is consistent with Exchange Act
section 15A(b)(6),\78\ which requires, among other things, that the
rules of a national securities association be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in facilitating transactions in securities, to
remove impediments to and perfect the mechanism of a free and open
market and a national market system, and, in general, to protect
investors and the public interest.
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\77\ In approving the proposed rule change, the Commission has
considered the impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\78\ 15 U.S.C. 78o-3(b)(6).
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The Commission believes that the proposed rule change would
increase the information available to investors
[[Page 17520]]
regarding the potential implications of transferring assets. The
Commission further believes that the proposed educational communication
may encourage former customers to make inquiries of their
representatives, which could increase communication between customers
and representatives about the potential implications of transferring
assets. The Commission believes that the increase in information and
communication about the potential implications of transferring assets
will benefit customers when deciding whether to transfer assets.
The Commission does not believe that the proposed rule change will
result in a burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Exchange Act. The Commission
believes FINRA has carefully crafted the proposed rule change to
achieve its intended and necessary regulatory purpose while minimizing
the burden on firms. Although the proposed rule change will impose new
requirements upon FINRA members, it will apply equally to all FINRA
members when hiring or otherwise associating with a registered
representative.
The Commission has considered the commenters' views on the proposed
rule change and believes that FINRA responded appropriately to the
concerns raised.
For the reasons stated above, the Commission finds that the rule
change is consistent with the Act and the rules and regulations
thereunder.
V. Conclusion
IT IS THEREFORE ORDERED, pursuant to Exchange Act section 19(b)(2)
\79\ that the proposed rule change (SR-FINRA-2015-057) be, and hereby
is, approved.
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\79\ 15 U.S.C. 78s(b)(2).
\80\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\80\
Brent J. Fields,
Secretary.
[FR Doc. 2016-06995 Filed 3-28-16; 8:45 am]
BILLING CODE 8011-01-P