Document ID: SEC-2014-0500-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2014-03-28T04:00Z

[Federal Register Volume 79, Number 60 (Friday, March 28, 2014)]
[Notices]
[Pages 17592-17610]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-06895]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71786; File No. SR-FINRA-2014-010]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Adopt 
FINRA Rule 2243 (Disclosure and Reporting Obligations Related to 
Recruitment Practices)

March 24, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 10, 2014, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to adopt FINRA Rule 2243, which would establish 
disclosure and reporting obligations related to member recruitment 
practices.
    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 and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Background
    FINRA members dedicate substantial resources each year to recruit 
registered persons (``representatives'') to their firms. Implicit in 
these recruitment efforts is an expectation that many of the 
representative's former customers will transfer assets to the member 
recruiting the representative (``recruiting firm'') based on the 
relationship that the representative has developed with those 
customers. To induce representatives to leave their current firm, 
recruiting firms often offer inducements to the representatives in the 
form of recruitment compensation packages. Recruitment compensation 
packages provide a significant layer of

[[Page 17593]]

compensation in addition to the commission payout grid or other 
compensation that a representative receives based on production at a 
new firm. Recruitment compensation typically takes the form of some 
combination of upfront payments, such as cash bonuses or forgivable 
loans, and potential future payments, such as performance-based bonuses 
or special commission schedules that are not provided to similarly 
situated representatives.
    FINRA understands that representatives who contact former customers 
to join them at their new firm often emphasize the benefits the former 
customers would experience by transferring their assets to the firm, 
such as superior products, platforms and service. However, while the 
recruiting firm and the representative understand the financial 
incentives at stake in a transfer, the representative's former 
customers who are contacted or notified about moving assets to the 
recruiting firm generally are not informed that their representative is 
receiving a recruitment compensation package to transfer firms, or the 
potential magnitude of such packages. Furthermore, the former customers 
often may not be aware of the potential financial impacts to their 
assets that may result if they decide to transfer assets to a new firm, 
including, among other things, costs incurred to close an account with 
their current firm, transfer assets or open an account at the 
recruiting firm, and tax consequences if some assets are not portable 
and must be liquidated before transfer.
    The proposed rule change aims to provide former customers of a 
representative with a more complete picture of the factors involved in 
a decision to transfer assets to a recruiting firm. FINRA believes that 
former customers would benefit from information regarding recruitment 
compensation packages and such other considerations as costs, fees and 
portability issues that may impact their assets before they make a 
decision to transfer assets to a recruiting firm. A representative's 
most recent 12-month gross production and revenue, often referred to as 
his or her ``trailing 12,'' is typically the prominent factor in how 
firms calculate recruitment compensation packages. Other factors may 
include the firm from which the representative is transferring, the 
representative's book of business, the percentage of a representative's 
book of business that he or she expects will transfer to the new firm, 
the representative's years of service, debts to his or her previous 
firm, and the business model of the firm offering the package. FINRA 
understands that for representatives transferring to a large wirehouse 
firm, a standard recruitment compensation package may include an 
upfront payment, usually in the form of a forgivable loan, with a 7 to 
10 year term that equals from 150 to 200 percent of the 
representative's trailing 12. These packages also typically include 
potential future payments that the representative earns if specified 
production targets are met at the recruiting firm.
    FINRA understands that smaller firms generally do not offer 
significant recruitment compensation packages to representatives. For 
representatives that move to a firm with an independent broker-dealer 
model, recruitment compensation also may not include significant 
upfront payments. Firms that operate under an independent model 
typically offer compensation packages that include transition 
assistance and higher commission payout grid compensation in lieu of 
upfront payments. Transition assistance packages are intended to offset 
costs incurred by a representative to transfer firms, such as moving 
expenses, leasing space, buying office supplies and furniture, and 
hiring staff. These arrangements also are often based on the 
representative's trailing 12 and can result in significant recruitment 
compensation packages depending on the recruited representative's 
production and client base.
    FINRA recognizes the business rationales for offering financial 
incentives and transition assistance to recruit experienced 
representatives and seeks neither to encourage nor discourage the 
practice with the proposed rule change. However, FINRA believes that 
former customers currently are not receiving important information from 
recruiting firms and representatives when they are induced to move 
assets to the recruiting firm. There are a number of factors a former 
customer should consider when making a decision to transfer assets to a 
new firm. These factors include, among other things, a representative's 
motives to move firms, whether those motives align with the interests 
and objectives of the former customer, and any costs, fees, or product 
portability issues that will arise as a result of an asset transfer to 
the recruiting firm. The proposed rule change is intended to provide 
former customers information pertinent to these considerations, so they 
have a more complete picture of the factors relevant to a decision to 
transfer assets to a new firm and can engage in further conversations 
with the recruiting firm or their representative in areas of personal 
concern. FINRA believes that former customers would benefit from 
knowing, among other things, the magnitude of the financial incentives 
that may have led their representative to change firms, how the former 
customer's assets, or trading activity, factored into the calculation 
of such incentives, and whether moving their assets to the recruiting 
firm will impact their holdings or impose new costs. The proposed rule 
change is intended to focus a former customer's attention on the 
decision to transfer assets to a new firm, and the direct and indirect 
impacts of such a transfer on those assets, so they are in a position 
to make an informed decision whether to follow their representative.
    In addition, the proposed rule change would require members to 
report to FINRA information related to significant increases in total 
compensation over the representative's prior year compensation that 
would be paid to the representative during the first year at the 
recruiting firm so that FINRA can assess the impact of these 
arrangements on a member's and representative's obligations to 
customers and detect potential sales practices abuses. FINRA believes 
that incorporating such data into its risk-based examination program 
will help to identify and mitigate potential harm to customers 
associated with member recruitment practices.
Disclosure and Reporting Obligations Related to Recruitment Practices
    The proposed rule change would provide targeted and meaningful 
information to customers at what FINRA believes to be a relatively low 
cost to firms and without implying any bad faith on the part of 
representatives who receive recruitment compensation to move firms. The 
proposed rule change includes a disclosure obligation to ``former 
customers''\3\ who the recruiting firm attempts to induce to follow a 
transferring representative and a reporting obligation to FINRA. First, 
it would require disclosure to former customers of a representative of 
the financial incentives the representative will receive in conjunction 
with the transfer to the recruiting firm and the basis for those 
incentives. Second, the proposed rule change would require disclosure 
to former customers of any costs, fees or product portability issues, 
including taxes if some assets must be liquidated prior to transfer, 
that will result if the former customer decides to transfer assets to 
the recruiting firm. The

[[Page 17594]]

proposed disclosures are intended to encourage customers to make 
further inquiry to reach an informed decision by providing a framework 
with some specific information to consider the impact to their 
accounts. Finally, the proposed rule change would require a recruiting 
firm to report to FINRA, at the beginning of a representative's 
employment or association with the firm, significant increases in total 
compensation over the representative's prior year compensation that 
would be paid to the representative during the first year at the 
recruiting firm. The details of proposed FINRA Rule 2243 (Disclosure 
and Reporting Obligations Related to Recruitment Practices) are set 
forth in detail below.
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    \3\ See definition of ``former customer'' discussed infra at 
page 81.
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Disclosure Requirement
    The proposed rule change would require a member that hires or 
associates with a representative and directly or through that 
representative attempts to induce a former customer of that 
representative to transfer assets to an account assigned, or to be 
assigned, to the representative at the member to disclose to the former 
customer if the representative has received or will receive $100,000 or 
more of either (1) aggregate ``upfront payments'' or (2) aggregate 
``potential future payments'' in connection with transferring to the 
member.\4\ The proposed rule change would require members to disclose 
recruitment compensation by separately indicating aggregate upfront 
payments and aggregate potential future payments in the following 
ranges: $100,000 to $500,000; $500,001 to $1,000,000; $100,000,001 to 
$2,000,000; $2,000,001 to $5,000,000; and above $5,000,000.\5\ Thus, 
the proposed rule change effectively establishes two separate de 
minimis exceptions for payments of less than $100,000: One applied to 
aggregate upfront payments and one applied to aggregate potential 
future payments. Members also would be required to disclose the basis 
for determining any upfront payments and potential future payments 
(e.g., asset-based or production-based) the representative has received 
or will receive in connection with transferring to the member.\6\
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    \4\ See proposed FINRA Rule 2243(a)(1). See also FINRA Rule 
0140(a), which states that persons associated with a member shall 
have the same duties and obligations as a member under FINRA rules.
    \5\ See proposed FINRA Rule 2243.01 (Disclosure of Ranges of 
Compensation).
    \6\ See proposed FINRA Rule 2243(a)(2).
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    The proposed rule change would define a ``former customer'' as any 
customer that had a securities account assigned to a representative 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\ For the purpose of the proposed 
rule, ``upfront payments'' would mean payments that are either received 
by the representative upon commencement of employment or association or 
specified amounts guaranteed to be paid to the representative at a 
future date, including, e.g., payments in the form of cash, deferred 
cash bonuses, forgivable loans, loan-bonus arrangements, transition 
assistance, or in the form of equity awards (e.g., restricted stock, 
restricted stock units, stock options, etc.) or other ownership 
interest.\8\ The term ``potential future payments'' would include, 
e.g., payments (including the forms of payments described in the 
definition of the term ``upfront payments'') offered as a financial 
incentive to recruit the representative to a member that are contingent 
upon satisfying performance-based criteria, or a special commission 
schedule for representatives paid on a commissioned basis beyond what 
is ordinarily provided to similarly situated representatives, or are an 
allowance for additional travel and expense reimbursement beyond what 
is ordinarily provided to similarly situated representatives.\9\ FINRA 
understands that members sometimes partner with another financial 
services entity, such as an investment adviser or insurance company, to 
recruit a representative. In those circumstances, both upfront payments 
and potential future payments would include payments by the third party 
as part of the recruitment arrangement.
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    \7\ See proposed FINRA Rule 2243.05(a). FINRA Rule 4512(c) 
defines ``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.
    \8\ See proposed FINRA Rule 2243.05(b).
    \9\ See proposed FINRA Rule 2243.05(c). FINRA notes that neither 
category of recruitment compensation would include higher commission 
schedule payouts received by a transferring representative, such as 
may occur where a representative transfers to an independent broker-
dealer, unless such payouts are beyond what is provided to similarly 
situated representatives, and that amount, alone or in combination 
with other payments, meets the $100,000 threshold for one of the 
categories of recruitment compensation.
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    In addition to the recruitment compensation disclosure, the 
proposed rule change would require the member to disclose to a former 
customer of the representative if transferring the former customer's 
assets to the member: (1) Will result in costs to the former customer, 
such as account termination or account transfer fees from the former 
customer's current firm or account opening or maintenance fees at the 
member, that will not be reimbursed to the former customer by the 
member; \10\ and (2) if any of the former customer's assets are not 
transferable to the member and that the former customer may incur 
costs, including taxes, to liquidate and transfer those assets in their 
current form to the member or inactivity fees to leave those assets 
with the former customer's current firm.\11\
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    \10\ See proposed FINRA Rule 2243(a)(3).
    \11\ See proposed FINRA Rule 2243(a)(4).
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    The proposed rule change would allow a member to rely on the 
reasonable representations of the representative, supplemented by the 
actual knowledge of the member, in determining whether the proposed 
disclosures must be made to a former customer.\12\ In the event that a 
member, after considering the representations of the newly hired 
representative, cannot make a determination whether any of the former 
customer's assets are not transferable to the member, the member must 
advise former customers in the disclosure: (1) To ask their current 
firms whether any of their assets will not transfer to the member and 
what costs, if any, the customers will incur to liquidate and transfer 
such assets or keep them in an account with their current firm and (2) 
that nontransferable securities account assets will be identified to 
the former customer in writing prior to, or at the time of, validation 
of the account transfer instruction pursuant to FINRA Rule 11870 
(Customer Account Transfer Contracts).\13\
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    \12\ See proposed FINRA Rule 2243.03 (Representations of a 
Registered Person).
    \13\ See supra note 12.
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    FINRA believes that the proposed rule change would provide key 
information to investors that they seldom receive today--that 
compensation may have been a motivating factor for a representative's 
transfer of firms, that the basis of any recruitment compensation may 
have or could impact the representative's treatment of the customer or 
the recommendation to move assets to the recruiting firm, that there 
may be costs associated with

[[Page 17595]]

transferring assets, and that there may be direct and indirect costs 
associated with liquidating or leaving behind nontransferable assets--
relevant to a decision to follow the representative to the recruiting 
firm.
    FINRA believes starting the disclosure of ranges of compensation at 
$100,000 for each category of recruitment compensation creates a 
reasonable de minimis exception from the proposed disclosure 
requirement at a level where the recruitment compensation or transition 
assistance are lesser motivating factors for a representative to move. 
FINRA will consider with interest comments on the appropriateness of 
the proposed de minimis exception amount of $100,000 for aggregate 
upfront payments and aggregate potential future payments; whether the 
disclosure of ranges of recruitment compensation should begin at a 
different amount; and whether the threshold should apply separately to 
upfront payments and potential future payments.
    More generally, FINRA believes disclosure of ranges of compensation 
received strikes a balance that will provide former customers detailed 
information about the nature and magnitude of the financial incentives 
involved in their representative's move to factor into their decision 
whether to transfer assets to the new firm, while reducing privacy 
concerns about specific disclosure of a representative's compensation. 
FINRA believes the specified level of detail regarding the 
representative's recruitment compensation and the treatment of former 
customer's assets is necessary to make the disclosures valuable to 
former customers. The disclosures are intended to prompt a dialogue 
between the former customer and the representative or recruiting firm 
by providing a framework to consider the impact of a decision to 
transfer assets to a new firm. FINRA believes that the proposed 
disclosures would encourage customers to make further inquiries to the 
representative and the recruiting firm to reach an informed decision 
about whether to transfer assets. In addition, FINRA believes that 
requiring the basis for recruitment compensation to be disclosed would 
allow a former customer to review his or her account activity during 
the relevant time to see if any unusual activity occurred to boost the 
representative's revenue base in anticipation of a move and to more 
closely monitor activity at the new firm, should the customer decide to 
move assets there.
Delivery of Disclosures
    The proposed rule change would require a member to deliver the 
proposed disclosures at the time of first individualized contact with a 
former customer by the representative or the member that attempts to 
induce the former customer to transfer assets to the member.\14\ If 
such contact is in writing, the written disclosures must accompany the 
written communication; if such contact is oral, the member must give 
the disclosures orally at the time of contact followed by written 
disclosures sent within 10 business days from such oral contact or with 
the account transfer approval documentation, whichever is earlier. If 
the representative or the member attempts to induce a former customer 
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 disclosures must be 
delivered to the former customer with the account transfer approval 
documentation.\15\ The disclosure requirement would apply for a period 
of one year following the date the representative begins employment or 
associates with the member.\16\
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    \14\ See proposed FINRA Rule 2243(b)(1).
    \15\ See proposed FINRA Rule 2243(b)(2).
    \16\ See proposed FINRA Rule 2243(b)(3).
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    FINRA believes that any action taken by a recruiting firm directly 
or through a representative that attempts to induce former customers of 
the representative to transfer assets to the recruiting firm should 
trigger the disclosures. As such, under the proposed rule change, 
actions by the recruiting firm or the representative that do not 
involve individualized contact, such as a tombstone advertisement, a 
general announcement, or a billboard, would be considered attempts to 
induce former customers to move their assets. In these circumstances, 
if a former customer subsequently decides to transfer assets to the 
recruiting firm without individualized contact, the proposed rule 
change would require the recruiting firm to provide the proposed 
disclosures to former customers with the account transfer approval 
documentation.
Format of Disclosures
    The proposed rule change would require a member to deliver the 
proposed disclosures in paper or electronic form in a format prescribed 
by FINRA, or an alternative format with substantially similar 
content.\17\ The proposed rule change would require that written 
disclosures must be clear and prominent.\18\ To facilitate uniform 
disclosure under the proposed rule change and to assist members in 
making the proposed disclosures to former customers of a 
representative, FINRA has developed a disclosure template form that 
members may use to make the required disclosures.\19\ Members may, 
however, create their own disclosure form, as long as it contains 
substantially similar content to the FINRA-developed template.
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    \17\ See proposed FINRA Rule 2243.02 (Format of Disclosures).
    \18\ See supra note 17.
    \19\ See Exhibit 3, attached to FINRA's filing with the 
Commission.
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    On the disclosure form, a member would be required to indicate the 
applicable range of compensation in each category of recruitment 
compensation (i.e., aggregate upfront payments and aggregate potential 
future payments), for compensation in amounts of $100,000 or more that 
the representative has received or will receive in connection with 
transferring to the member. Thus, a representative who receives $75,000 
in aggregate upfront payments and $75,000 in potential future payments 
would not trigger the compensation disclosure under the proposed rule 
because the $100,000 threshold applies separately to each category of 
recruitment compensation. Members also would be required to indicate 
the basis for those payments, e.g., assets brought in or future 
production. In addition, members would be required to indicate if 
transferring assets to the representative's new firm will result in 
costs to the former customer that will not be reimbursed by the member, 
if any of the former customer's assets are not transferable to the 
member and that the former customer may incur costs, including taxes, 
to liquidate and transfer those assets in their current form to the 
member or inactivity fees to leave those assets with the former 
customer's current firm.
    The FINRA-developed disclosure template would include a free text 
section in which the member or representative may include additional, 
contextual information regarding the disclosures, as long as such 
information is not false or misleading. A member could provide the same 
context in a disclosure form of its own design, as long as it does not 
obscure or overwhelm the required disclosures and is not false or 
misleading. FINRA believes that allowing members and representatives an 
opportunity to provide context regarding the disclosures will alleviate 
concerns that

[[Page 17596]]

the disclosures will be confusing or imply bad faith on the part of the 
representative. FINRA believes that providing a uniform disclosure form 
will allow members to make the required disclosures at a relatively low 
cost and without significant administrative burdens.
Reporting Requirement
    The proposed rule change would require a member to report to FINRA 
at the beginning of the employment or association of a representative 
that has former customers (as defined by proposed Rule 2243.05) if the 
member reasonably expects the total compensation paid to the 
representative by the member during the representative's first year of 
employment or association with the member to result in an increase over 
the representative's prior year compensation by the greater of 25% or 
$100,000.\20\ In determining total compensation, the member must 
include any aggregate upfront payments, aggregate potential future 
payments, increased payout percentages or other compensation the member 
reasonably expects to pay the representative during the first year of 
employment or association with the member. A member's report to FINRA 
must include the amount and form of such total compensation and other 
related information, in the time and manner that FINRA may prescribe.
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    \20\ See proposed FINRA Rule 2243(c) (Reporting Requirement).
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    The compensation information reported to FINRA pursuant to the 
proposed rule would not be made available to the public. FINRA intends 
to use the reported compensation information as a data point in its 
risk-based examination program. As such, FINRA believes it is important 
to capture the compensation information in a structured way. FINRA 
believes this data will help FINRA examiners better assess the adequacy 
of firm systems to monitor conflicts of interest and systems to detect 
and prevent underlying business conduct abuses potentially attributable 
to recruitment compensation incentives, and target exams where concerns 
appear. This data also will help FINRA to identify whether the 
conflicts of interest attendant to particular levels or structures of 
increased compensation when a representative transfers firms result in 
customer harm that is not adequately addressed by current FINRA 
rules.\21\ Further, FINRA believes such data would inform any future 
rulemaking to require firms to manage conflicts arising from specific 
compensation arrangements. In addition, FINRA believes the proposed 
reporting requirement itself could mitigate potential sales practice 
violations, as it might encourage firms to give greater supervisory 
attention to the more lucrative compensation packages that will be 
reported to FINRA.
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    \21\ Recruitment compensation packages offered to 
representatives have been the subject of regulatory concern for many 
years. Former SEC Chairman Schapiro identified potential conflicts 
raised by recruitment practices in 2009 in an open letter to broker-
dealer CEOs. The letter noted that: ``[s]ome types of enhanced 
compensation practices may lead registered representatives to 
believe that they must sell securities at a sufficiently high level 
to justify special arrangements that they have been given. Those 
pressures may in turn create incentives to engage in conduct that 
may violate obligations to investors. For example, if a registered 
representative is aware that he or she will receive enhanced 
compensation for hitting increased commission targets, the 
registered representative could be motivated to churn customer 
accounts, recommend unsuitable investment products or otherwise 
engage in activity that generates commission revenue but is not in 
investors' interest.'' See Open Letter to Broker-Dealer CEOs from 
SEC Chairman Mary L. Schapiro, dated August 31, 2009.
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Calculating Compensation
    The proposed rule change would provide that in calculating 
compensation for the purpose of the proposed disclosure requirement and 
the proposed reporting requirement to FINRA, a member: (1) Must assume 
that all performance-based conditions on the representative's 
compensation are met; (2) may make reasonable assumptions about the 
anticipated gross revenue to which an increased payout percentage will 
be applied; and (3) may net out any increased costs incurred directly 
by the representative in connection with transferring to the 
member.\22\ Members must include as part of such calculations all 
compensation the representative has received or will receive that is 
based on gross commissions and assets under care from brokerage 
business and, if applicable, fee income and assets under management 
from investment advisory services. For example, a dual-hatted 
representative that receives from the recruiting firm an upfront 
payment of $1.5 million based on gross commissions from brokerage 
business and an upfront payment of $1 million based on fees and assets 
under management from investment adviser business would be required to 
indicate on the customer disclosure form that he or she has received 
recruitment compensation in the range of $2,000,001 to $5,000,000 in 
aggregated upfront payments, and include $2.5 million in upfront 
payments as part of calculating total compensation for the purposes of 
the reporting requirement to FINRA.
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    \22\ See proposed FINRA Rule 2243.04 (Calculating Compensation).
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    FINRA will announce the effective date of the proposed rule change 
in a Regulatory Notice to be published no later than 60 days following 
Commission approval. The effective date will be no later than 180 days 
following publication of the Regulatory Notice announcing Commission 
approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\23\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that the proposed rule change will 
promote investor protection by providing information on the costs and 
conflicts associated with a former customer's important decision 
whether to transfer assets to a representative's new firm. FINRA 
further believes that the proposed rule change would allow a former 
customer to make a more informed decision, taking into account the 
financial incentives that may motivate a representative to move firms 
and induce a customer to follow, as well as the costs to be borne by 
the customer in connection with transferring assets and the possibility 
that some assets cannot transfer. In addition, the proposed requirement 
to report to FINRA significant increases in total compensation in a 
representative's first year at a recruiting firm will enhance investor 
protection by allowing FINRA to monitor such practices and use the data 
collected to detect potential sales practice abuses.
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    \23\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. By relying on disclosure and 
reporting, the proposed rule seeks to focus a former customer's 
attention on the decision to transfer assets to a new firm, and the 
direct and indirect impacts of such a transfer on those assets, so they 
are in a position to make an informed decision whether to follow their 
representative.
    The proposed rule would require a recruiting firm to determine the 
dollar

[[Page 17597]]

value of a representative's recruitment compensation, and if meeting a 
threshold, provide disclosure to former customers the recruiting firm 
or representative attempt to induce to transfer assets during the 
representative's first year of employment or association. In addition, 
the proposed rule would require the recruiting firm to report 
information about a representative's total compensation to FINRA if it 
meets the proposed threshold. Firms also would be responsible for 
developing compliance policies, training and tracking for the proposed 
rule. Some commenters have noted that the proposed rule also may have 
an impact on the market for representatives.
    FINRA does not believe that the proposed rule change will impose 
undue operational costs on members to comply with the disclosure and 
reporting obligations because the information needed to make the 
calculations resides with either the recruiting firm or the 
representative. The recruiting firm knows how much upfront compensation 
they will be paying the representative, as well as the additional 
potential future income the representative may earn if he or she 
satisfies conditions. Furthermore, the proposed rule change permits the 
recruiting firm to make reasonable assumptions about the gross revenue 
to which any increased payout percentage may apply. In addition, FINRA 
understands that the recruiting firm or the representative typically 
has ongoing contact with former customers, thereby facilitating the 
opportunity for the disclosures to be made. With respect to the 
disclosure of costs, FINRA believes that the representative will know 
of costs a former customer will incur at the current firm to transfer 
assets or leave them inactive and that the recruiting firm knows the 
costs it imposes to transfer assets and open and maintain an account 
there. Also, the proposed rule change allows the recruiting firm to 
rely on the reasonable representations of the representative for much 
of the information, and with respect to portability, give more 
generalized disclosure where the information cannot be ascertained from 
the representative or other actual knowledge.
    In developing the proposed rule change, FINRA considered several 
alternatives to the proposed rule change, which are set forth below, to 
ensure that it is narrowly tailored to achieve its purposes described 
previously without imposing unnecessary costs and burdens on members or 
resulting in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act. The proposed 
rule change addresses many of the concerns noted by commenters in 
response to an earlier version of the proposal.\24\
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    \24\ See Item C., which contains a detailed discussion of the 
earlier version of the proposal that was published in Regulatory 
Notice 13-02 (January 2013).
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    First, the earlier version of the proposed rule change would have 
required a member that provides, or has agreed to provide, to a 
representative enhanced compensation in connection with the transfer of 
securities employment of the representative from another financial 
services firm to disclose the details, including specific amounts, of 
such enhanced compensation \25\ to any former customer of the 
representative at the previous firm that is contacted regarding the 
transfer of the securities employment (or association) of the 
representative to the recruiting firm, or who seeks to transfer assets, 
to a broker-dealer account assigned to the representative with the 
recruiting firm. The earlier proposal did not include any disclosure of 
costs or portability ramifications associated with transferring assets 
to the new firm. As discussed in detail in Item C., a majority of the 
comments received on the earlier version of the proposal opposed 
specific disclosure of enhanced compensation, stating that it was 
burdensome, an invasion of privacy and failed to address a particular 
harm to customers. Some commenters instead favored general disclosure 
that a representative is receiving unspecified compensation as part of 
a transfer.
---------------------------------------------------------------------------

    \25\ In the initial proposal, the term ``enhanced compensation'' 
was defined as compensation paid in connection with the transfer of 
securities employment (or association) to the recruiting firm other 
than the compensation normally paid by the recruiting firm to its 
established registered persons. Enhanced compensation included but 
was not limited to signing bonuses, upfront or back-end bonuses, 
loans, accelerated payouts, transition assistance, and similar 
arrangements, paid in connection with the transfer of securities 
employment (or association) to the recruiting firm.
---------------------------------------------------------------------------

    FINRA considered, as an alternative to the proposed rule change, a 
proposal that would have included a general recruitment compensation 
disclosure (i.e., no specific dollar amounts) and general disclosure 
that the former customer may incur costs or encounter portability 
issues in connection with any asset transfer. However, FINRA believes 
that the proposed rule change is preferable to alternatives with 
general disclosure requirements because the general disclosure approach 
does not give former customers any sense of the scope or magnitude of a 
representative's recruitment compensation package or whether the cost 
and portability disclosures will actually impact their personal 
holdings. FINRA developed the revised approach in the proposed rule 
change to strike a balance between specific disclosure and general 
disclosure by requiring disclosure of ranges of compensation of 
$100,000 or more as applied separately to aggregate upfront payments 
and aggregate potential future payments and affirmative cost and 
portability statements.
    The proposed disclosure of ranges of recruitment compensation 
provides customers with meaningful information, i.e., that compensation 
may have been a motivating factor in their representative's decision to 
change firms, to consider in conjunction with a representative's other 
stated reasons for changing firms, without requiring members to 
disclose specific information about the payments that may compromise 
the privacy of the representative. As noted in Item A., representatives 
often emphasize the superior products, platforms and services of the 
recruiting firm without disclosing the lucrative financial incentives 
they have received or will receive in connection with the transfer. In 
addition, to assist members with compliance with the proposed rule 
change and to mitigate costs and administrative burdens, FINRA 
developed a disclosure form that members may use to make the required 
disclosures. The proposed rule change adds flexibility by allowing 
recruiting firms to deliver the disclosures in an alternative format 
with substantially similar content so firms can leverage existing 
compliance efforts or procedures.
    Second, as noted above, the proposed rule change exempts 
compensation that does not meet a $100,000 threshold as applied 
separately to aggregate upfront payments and aggregate potential future 
payments for purposes of disclosure to former customers and 
compensation that does not meet a threshold of the greater of 25% or 
$100,000 over the representative's prior year's compensation for 
purposes of reporting total compensation to FINRA, and allows members 
to net out direct costs paid by the representative in a transfer to a 
new firm when making such calculations. The initial proposal included a 
$50,000 exception, which many commenters opposed because, among other 
things, they felt it was arbitrary, too low to cover expenses incurred 
by representatives to transfer firms and did not allow firms to net out 
direct costs incurred by the representative in calculating recruitment 
compensation. Based on the

[[Page 17598]]

comments and discussions with firms, FINRA believes that raising the 
proposed de minimis exception for recruitment compensation to $100,000 
for each of aggregate upfront payments and aggregate potential future 
payments will substantially mitigate costs for firms without 
compromising investor protection. Based on input from firms that offer 
recruitment compensation, FINRA believes the proposed de minimis 
exception will except from the disclosure obligation those firms whose 
payments are only intended as transition assistance to help cover 
relocation and overhead costs, such as new business cards and 
letterhead, and that amounts below this threshold significantly 
diminish the motivating impact for the representative to move firms and 
therefore would not be as meaningful to customers. FINRA also 
understands that recruitment compensation that exceeds the $100,000 
threshold for aggregate upfront payments and aggregate potential future 
payments is typically offered only by the largest firms and therefore 
the disclosure obligation should not impact most small firms or 
independent broker-dealers, where the relative costs of compliance 
would be more burdensome.
    FINRA understands the proposed de minimis exception for disclosure 
of compensation under $100,000 in each category of recruitment 
compensation may impose some burden on small member firms to establish 
administrative processes to track compensation and to ensure that 
records are available to evidence compliance. FINRA does not believe 
that the administrative costs to track recruitment compensation 
outweighs the investor protection benefits of increased transparency to 
inform former customers about recruitment compensation that may have 
motivated their representative to move firms before they decide to 
transfer account assets to their representative's new firm. In 
addition, FINRA notes that the proposed rule change incorporates a 
provision that permits members to net out costs directly incurred by a 
representative in connection with a transfer to the recruiting firm. 
Members would measure compensation amounts for purposes of determining 
the $100,000 threshold in each category of recruitment compensation 
after direct costs to the representative in connection with the 
transfer have been netted out. Therefore, FINRA believes it is more 
likely that the de minimis exception will apply when a representative 
moves from a wirehouse firm to a firm with an independent broker-dealer 
model or when a representative otherwise incurs direct costs associated 
with a transition.
    Third, the proposed rule change limits the proposed disclosures to 
situations where a member, directly or through a representative, 
attempts to induce that representative's former customers to transfer 
assets to the member. Recruiting firms would not have to make the 
disclosures to former customers if the recruiting firm or 
representative does not undertake any efforts to induce former 
customers to transfer assets to the member, either through 
individualized contact, such as an email or phone call, or non-
individualized contact, such as a tombstone advertisement, a billboard 
or a notification on the firm's Web site.
    Fourth, FINRA notes that the proposed rule change includes a one-
year disclosure period so that members do not have to track for or 
provide disclosures to customers after the representative has been with 
the firm for a year. FINRA considered an alternative that would have 
required disclosure for as long as the representative continued to 
receive recruitment compensation, which in some cases, could be 10 
years. FINRA understands that most former customers who transfer assets 
to the representative's new firm do so soon after the representative 
changes firms so the one-year period should provide a reasonable end 
date for the proposed disclosure requirement.
    Fifth, FINRA considered whether the proposed rule should apply to 
any new customers of the representative at the new firm, or whether 
disclosure to just former customers would accomplish the goals of the 
proposed rule change. FINRA determined that it would limit the proposed 
rule to former customers of the representative because the recruitment 
compensation the representative has received or will receive in a 
transfer is likely based on activity in the accounts of such former 
customers and the expectation that they will transfer assets to follow 
the representative to the recruiting firm. In addition, representatives 
should have a sense of how moving assets to the recruiting firm will 
impact former customers' accounts because they are aware of the costs 
associated with account termination, transfer and opening and product 
limitations at their previous firm and at the recruiting firm. 
Representatives are less likely to have similar information for new 
customers opening an account with the recruiting firm. A customer 
opening a new account also does not have an established relationship 
with the representative and, in many cases, has already determined to 
place assets with a new firm without any inducement from the 
representative.
    Sixth, FINRA considered whether the proposed rule should require 
disclosure to current customers when their representative receives a 
retention bonus. As explained in more detail in Item C., the proposed 
rule change does not include that requirement because the proposal is 
more narrowly focused on providing a former customer important 
information when deciding whether to follow his or her representative 
to a new firm, and incentives offered to a representative while at a 
firm do not implicate the same considerations for customers, such as 
transfer costs and portability issues. FINRA notes that to the extent a 
retention bonus is part of a recruitment compensation package, 
disclosure would be required as a potential future payment if the 
magnitude of the bonus exceeds the $100,000 threshold. FINRA further 
notes that the reporting requirement in the proposed rule change is 
intended, in part, to provide insight as to whether compensation 
packages are resulting in increased risk to customers of inappropriate 
sales practice activities. That information will help inform whether 
additional regulation around retention bonuses or other compensation 
incentives is necessary.
    Finally, in considering the proposed requirement that members 
report to FINRA significant increases in a recruited representative's 
total compensation over the prior year, FINRA notes that it consulted 
with its advisory committees to determine the proposed threshold of the 
greater of $100,000 or 25%, which is intended to exclude compensation 
arrangements that do not pose the same level of potential conflicts of 
interest. FINRA believes compensation increases of amounts below the 
threshold are less valuable for its examination program, particularly 
when compared to the burden of compliance on smaller firms that are 
more likely to offer recruitment packages in those ranges. FINRA will 
consider with interest comment on whether the proposed threshold is 
appropriate and, if commenters favor an alternative, the reasons why 
such alternative is preferable.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    FINRA published an earlier version of the proposal for comment in 
Regulatory Notice 13-02 (January 2013) (the ``Notice Proposal''). A 
copy of the

[[Page 17599]]

Notice Proposal is attached as Exhibit 2a. The comment period expired 
on March 5, 2013. FINRA received 567 comment letters in response to the 
proposal, of which 65 were unique letters. A list of the comment 
letters received in response to the Notice Proposal is attached as 
Exhibit 2b.\26\ Copies of the comment letters received in response to 
that proposal are attached as Exhibit 2c.\27\ Of the 65 unique comment 
letters received, 21 were generally in favor of the proposed rule 
change, 43 were generally opposed, and one letter did not address the 
merits of the proposal.
---------------------------------------------------------------------------

    \26\ All references to the commenters under this Item are to the 
commenters as listed in Exhibit 2b.
    \27\ Exhibits 2a, 2b, and 2c are attached to FINRA's filing with 
the Commission.
---------------------------------------------------------------------------

    The Notice Proposal required a member that provides, or has agreed 
to provide, to a representative ``enhanced compensation'' in connection 
with the transfer of securities employment of the representative from 
another financial services firm to disclose the details of such 
enhanced compensation to any former customer of the representative at 
the previous firm who: (1) Is individually contacted by the member or 
representative, either orally or in writing, regarding the transfer of 
employment (or association) of the representative to the member; or (2) 
seeks to transfer an account from the previous firm to an account 
assigned to the representative with the member. The proposal defined 
enhanced compensation to include signing bonuses, upfront or back-end 
bonuses, loans, accelerated payouts, transition assistance, and similar 
arrangements. The proposal would have required disclosure for one year 
following the date the representative associates with the recruiting 
firm. The proposal included an exception for enhanced compensation of 
less than $50,000 and customers that meet the definition of an 
institutional account pursuant to FINRA Rule 4512(c), except any 
natural person or a natural person advised by a registered investment 
adviser.
    Comments in support of the proposal were split between those that 
favored specific disclosure and those that advocated general disclosure 
of recruitment compensation. In general, comments opposed to the 
proposal asserted that it did not address an identifiable harm to 
customers, was pejorative toward representatives, invaded their 
privacy, and failed to include other cost impacts to customers when 
transferring their accounts. The comments and FINRA's responses are set 
forth in detail below.
Support for the Notice Proposal
    In general, commenters that supported the proposal stated that 
disclosing specific recruitment compensation to customers would provide 
investors with information relevant to investment decisions, promote 
greater transparency, increase investor confidence and trust, and 
increase customer awareness of potential conflicts of interest relating 
to recruitment compensation packages.\28\ One commenter noted that the 
proposal put the interest of customers first, supported a high standard 
of business ethics, and provided disclosure appropriate for customers 
to make informed decisions without prohibiting legitimate business 
practices.\29\ Another commenter noted that informing customers of 
potential conflicts of interest regarding recruitment compensation is 
especially important if the representative's compensation is determined 
by the assets a customer moves to the representative's new firm.\30\ 
One commenter also noted that most representatives do not tell 
customers that they are receiving recruitment compensation for moving 
customer assets to the new firm and inflate production to benefit 
trailing 12 calculations.\31\ Another commenter stated that registered 
investment advisers are required to disclose all conflicts of interest, 
including those that may arise when the adviser changes firms.\32\ Two 
commenters noted that transparency is a key component of a customer's 
ability to make an informed decision about transferring his or her 
assets.\33\
---------------------------------------------------------------------------

    \28\ APA, Arrigo, Capstone-FA, Cornell, Edward Jones, HDVest, 
JGHeller, Merrill, Miami, Morgan Wilshire, MSWM, NASAA, Oppenheimer, 
PIABA, Ruchin, Scott Smith, Summit-E, UBS, Wedbush, WFA.
    \29\ UBS.
    \30\ Capstone-FA.
    \31\ APA.
    \32\ Cornell.
    \33\ Morgan Wilshire, Wedbush.
---------------------------------------------------------------------------

Specific vs. General Enhanced Compensation Disclosure
    Several commenters wrote in support of uniform, industry-wide 
disclosure of recruitment compensation to customers, including the form 
of the recruitment compensation arrangement and specific dollar 
amounts.\34\ One commenter suggested that FINRA should work with the 
industry to create a model approach that clearly articulates 
appropriate disclosure for enhanced compensation arrangements and 
supported concise, direct and plain English disclosures of information 
that is sufficient to inform an investor of the potential material 
conflicts of interest that may arise in connection with recruiting 
related bonus payments.\35\ Another commenter noted that specific 
disclosure would make it significantly easier for former customers to 
assess the merits of the change to reach an informed decision about 
whether to transfer an account to the new firm.\36\
---------------------------------------------------------------------------

    \34\ Edward Jones, Merrill, MSWM, NASAA, Summit-E, UBS, WFA.
    \35\ SIFMA.
    \36\ Oppenheimer.
---------------------------------------------------------------------------

    The Notice Proposal requested comment on an alternative approach 
that would require a general upfront disclosure by the recruiting firm 
or representative that the representative is receiving, or will 
receive, material enhanced compensation in connection with the transfer 
of securities employment (or association) to the recruiting firm and 
that additional specific information regarding the details of such 
compensation would be available at a specified location on the firm's 
Web site or upon request.
    A few commenters asserted that a general disclosure would dilute 
the goal of proactive, timely disclosure because customers would carry 
the burden to seek out the more detailed disclosures from the member or 
representative.\37\ One commenter opposed the alternative approach 
because the more detailed web-based disclosure would be accessible not 
only by customers, but also the public.\38\ Numerous commenters 
suggested that the proposal should require general disclosure of 
recruitment compensation, instead of specific disclosure, with an 
opportunity for customers to request more information from the 
representative or member regarding the details of such 
compensation.\39\ Some commenters also stated that a general disclosure 
would prompt a dialogue between the representative and retail customers 
that would be more valuable than raw numbers without context.\40\
---------------------------------------------------------------------------

    \37\ Edward Jones, Summit-E, UBS.
    \38\ Summit-E.
    \39\ Advisor Group, Ameriprise, BDA, Bischoff, Cetera, Janney, 
LaBastille, Lax, Lincoln, Miami, NAIFA, Plexus, Stifel, Summit-B, 
Sutherland, Wedbush.
    \40\ Ameriprise, Cetera, Wedbush.
---------------------------------------------------------------------------

    Several commenters stated that a brief, plain English, generic 
disclosure with the delivery of Automated Customer Account Transfer 
Service (``ACATS'') forms or at account opening would be more 
meaningful to customers than specific disclosure of compensation, and 
also would avoid

[[Page 17600]]

privacy and anti-competitive issues.\41\ Several other commenters noted 
that specific disclosure might mislead or confuse customers and would, 
therefore, not be helpful or serve the purposes of investor 
protection.\42\ One commenter stated that customers might view 
recruitment compensation as a bribe or excessive.\43\ One commenter 
suggested that firms should provide customers with a single page, plain 
English form to inform the client that their representative is 
receiving recruitment compensation exceeding $50,000 and, although the 
representative is under no suspicions of acting unethically, FINRA has 
identified enhanced compensation as an area prone to conflicts, and any 
concerns regarding the management of investment accounts and objectives 
should be raised with the representative.\44\ Two commenters noted that 
disclosure of specific recruitment compensation may be viewed as a 
measure of the new firm's endorsement of the representative.\45\
---------------------------------------------------------------------------

    \41\ Ameriprise, Cetera, Janney, Lax, Stifel, Sutherland, 
Wedbush.
    \42\ Advisor Group, BDA, Bischoff, Burns, Miami, NAIFA, Plexus, 
Sutherland.
    \43\ Smith Moore.
    \44\ Cornell.
    \45\ Burns, Elzweig.
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    As discussed in Item B., FINRA does not agree that general 
disclosure of recruitment compensation would provide sufficient 
information for a former customer to weigh in a decision whether to 
transfer assets to his or her representative's new firm. FINRA 
continues to believe that some level of specificity regarding the 
magnitude of recruitment compensation paid by a member to a 
representative is necessary for the disclosure to be meaningful to 
former customers. FINRA believes that customers need some quantifiable 
measure to evaluate the impact recruitment compensation may have had on 
the representative's decision to move firms and his or her attempt to 
induce former customers to transfer assets to that new firm. FINRA 
further believes that the disclosure of ranges of compensation will 
provide a former customer enough sense of the magnitude of the payments 
to foster further inquiry with the representative if the customer finds 
the compensation relevant to his or her decision to transfer assets to 
the new firm.\46\
---------------------------------------------------------------------------

    \46\ See also FINRA's responses to comments regarding privacy 
and anti-competitive concerns on pages 110 through 116.
---------------------------------------------------------------------------

Opposition to the Notice Proposal
    In general, commenters opposed to the proposal stated that it does 
not address an identifiable harm or conflict of interest, is 
unnecessary and redundant, and does not provide additional protections 
to retail investors beyond existing rules (e.g., FINRA's suitability 
rule already addresses churning and unsuitable recommendations and 
FINRA's supervision rules address firms' supervisory systems).\47\ 
Three commenters noted that the benefits of the proposal are unclear 
because, among other things, a representative's compensation has no 
direct impact on a customer's account and recruitment compensation does 
not present a conflict of interest that is distinguishable from other 
compensation arrangements not covered by the proposal.\48\
---------------------------------------------------------------------------

    \47\ Abel, Advisor Group, Ameriprise, APA, BDA, Bischoff, Burns, 
Capstone-AG, Cetera, Commonwealth, Cutter, Edde, Elzweig, FORM, FSI, 
Gompert, Janney, LaBastille, Lincoln, LPL, NPB, SIPA, Smith Moore, 
Spartan, Stifel, Sutherland, Summit-B, Summit-E, Taylor, Taylor 
English, Whitehall, Wilson, Wood.
    \48\ Smith Moore, Sutherland, Taylor English.
---------------------------------------------------------------------------

    Five commenters stated that the proposal is not helpful to 
customers and will not assist them in making a decision to transfer 
assets to a new firm.\49\ Three commenters stated that the proposal is 
not well designed to mitigate conflicts or help customers because it 
does not prohibit any action; it merely provides an incomplete 
disclosure of one of many potential conflicts.\50\ A few commenters 
stated that if the true intent of the proposal is to reduce conflicts 
of interest by curtailing recruitment compensation packages, then it 
would be more efficient for FINRA to address such arrangements, rather 
than requiring disclosure to customers with the hope that the second 
order impact will be for firms to change their practices.\51\
---------------------------------------------------------------------------

    \49\ Advisor Group, Bischoff, Commonwealth, Spartan, Wedbush.
    \50\ Burns, Taylor English, Showalter.
    \51\ Cutter, Taylor English, Whitehall.
---------------------------------------------------------------------------

    Numerous commenters questioned the purpose of the proposal given 
the lack of evidence that recruitment compensation harms clients in any 
way.\52\ Several commenters noted that FINRA cited no enforcement 
actions, cases, customer complaints or other empirical evidence that 
enhanced compensation creates a conflict of interest between customers 
and representatives and requested that FINRA consider modifying the 
proposal to more accurately address any perceived harm.\53\ One 
commenter stated that more rigorous analysis is needed to determine if 
an actual conflict exists.\54\
---------------------------------------------------------------------------

    \52\ Advisor Group, Burns, Cutter, Edde, Herskovits, Smith 
Moore, Summit-B, Sutherland, Taylor English, Wedbush and Whitehall.
    \53\ Burns, Commonwealth, Janney, Stifel, Sutherland.
    \54\ Janney.
---------------------------------------------------------------------------

    Several commenters were concerned that the proposal assumes that 
representatives act in bad faith and implies that customers should not 
trust representatives if they have received recruitment compensation, 
even if it merely helps offset the cost of moving firms.\55\ One 
commenter noted that the backlash from customers will outweigh any 
benefits of the proposal.\56\ Another commenter noted that the proposal 
does not explain how the significant consequences to the representative 
of specific compensation disclosure are outweighed by the benefit to 
retail customers and suggested focus group testing to determine whether 
a general disclosure would be as effective as specific disclosure.\57\ 
One commenter stated that the proposal will cause jealousy and bad will 
among clients, create a more litigious environment, and will force 
representatives to take on larger and fewer clients.\58\ Another 
commenter stated that the disclosure will put pressure on 
representatives to perform above prevailing market conditions to 
justify payouts.\59\ One commenter stated that the proposal will 
further sensationalize the transition of a representative to another 
firm.\60\ Another commenter stated that it, instead, could harm a 
representative's interests with no practical purpose.\61\ However, one 
commenter stated that specific disclosure of recruitment compensation 
that is moderate and reasonable will not negatively affect 
representatives because he or she can explain the benefits of the move 
and the costs and lost revenues involved in the transition.\62\
---------------------------------------------------------------------------

    \55\ Abel, Ameriprise, Burns, Capstone-AG, Commonwealth, Cutter, 
FORM, FSI, Lincoln, LPL, Whitehall.
    \56\ Bischoff.
    \57\ FSI.
    \58\ Wilson.
    \59\ Taylor.
    \60\ Smith Moore.
    \61\ Lax.
    \62\ Korth.
---------------------------------------------------------------------------

    Some commenters raised concerns that the proposed disclosure will 
be confusing to customers because they cannot understand the complexity 
of compensation packages and, therefore, the proposal will not be 
valuable to them or serve the purposes of investor protection.\63\ One 
commenter noted that customers are not in a position to judge the 
merits of recruitment compensation to understand their value to the 
future

[[Page 17601]]

of a firm or branch, and are more likely to view them all 
negatively.\64\ Other commenters requested clarification of what is 
meant by disclosure of ``details'' of enhanced compensation and 
``similar arrangements.''\65\
---------------------------------------------------------------------------

    \63\ Advisor Group, BDA, Miami, Plexus, Sutherland.
    \64\ Bischoff.
    \65\ Sutherland, Lax, NAIFA, Cutter, Summit-E.
---------------------------------------------------------------------------

    A number of commenters also noted that recruitment compensation may 
actually benefit investors because it may cover ACATS transfer fees, 
moving expenses, or new advertising materials, and allow the 
representative to move to a new firm with better service.\66\ One 
commenter noted that the proposal does not consider that 
representatives who receive significant recruitment compensation 
packages are those that are in high demand and the firms that recruit 
them will have quality platforms and services that will benefit 
clients.\67\
---------------------------------------------------------------------------

    \66\ FORM, Lincoln, LPL, Capstone-AG.
    \67\ Elzweig.
---------------------------------------------------------------------------

    FINRA believes the proposed rule change addresses many of the 
commenters' concerns by better focusing the proposal on the impact to 
customers when they are considering transferring assets to a 
representative's new firm, rather than specific amounts of recruitment 
compensation paid to a representative. As stated in Item A., FINRA 
recognizes the business rationales for offering financial incentives 
and transition assistance to recruit experienced representatives and 
seeks neither to encourage nor discourage the practice with the 
proposed rule change. The proposed rule change also does not intend to 
cast representatives in a negative light for receiving recruitment 
compensation when they accept a new position.
    The proposed rule change would require disclosure of ranges of 
compensation, instead of specific amounts of compensation, and expands 
the disclosures to include information about the costs, fees, and 
portability issues that will directly impact a customer's assets. The 
proposed rule change is intended to provide former customers with this 
information, so they have a more complete picture of the factors 
relevant to a decision to transfer assets to a new firm and can engage 
in further conversations with the recruiting firm or their 
representative in areas of personal concern. Moreover, the proposed 
rule change will focus a former customer's attention on the decision to 
transfer assets to a new firm, and the direct and indirect impacts of 
such a transfer on those assets, so they are in a position to make an 
informed decision whether to follow their representative.
    FINRA does not believe that former customers will be confused by a 
clear, plain English disclosure regarding a representative's 
recruitment compensation. However, FINRA notes that the proposed rule 
change amends the Notice Proposal to require disclosure of ranges of 
compensation, the basis for such compensation, and other important 
considerations that a former customer should consider when they are 
deciding whether to transfer assets to a new firm. The proposed rule 
change would require members to use the FINRA-developed disclosure 
template, or their own form with substantially similar content, and 
would include a free text section to include contextual information 
regarding the disclosures. In addition, members would be required to 
include descriptions regarding ``upfront payments'' and ``potential 
future payments'' to assist customers in understanding the types of 
payments that their representative has received or will receive from 
the recruiting firm.
    As noted in Item A., FINRA believes the proposed rule change 
provides targeted and meaningful information to customers at a 
relatively limited cost to firms and without implying any bad faith on 
the part of the registered representative. The disclosures are intended 
to encourage customers to make further inquiry to reach an informed 
decision by providing a framework with some specific information to 
consider the impact to their accounts. In addition, FINRA believes that 
former customers should be given enough information to understand how 
their assets factor into the calculation of their representative's 
recruitment compensation package, and how much money is at stake in 
these transfers.
Privacy Concerns
    Numerous commenters opposed specific disclosure of recruitment 
compensation because it would interfere with a representative's right 
to privacy.\68\ Some commenters stated that the proposal threatens the 
financial privacy of representatives in a manner that is unfair, 
needlessly intrusive, and may jeopardize client relationships.\69\ 
Others noted that it will expose personal and confidential information 
without any tangible benefit to the customer and should not be required 
absent a compelling public policy reason to do so.\70\ One commenter 
minimized the operational and privacy concerns stating that they do not 
outweigh clients' best interests, and disclosures may enhance client 
relationships based on transparency and trust.\71\
---------------------------------------------------------------------------

    \68\ Ameriprise, Burns, Cetera, Gompert, Janney, Lax, Stifel, 
Sutherland, Wedbush, Whitehall, Wilson.
    \69\ FSI, Herskovits, LaBastille, Lax, Stifel.
    \70\ Ameriprise, BDA, Stifel.
    \71\ MSWM.
---------------------------------------------------------------------------

    A number of commenters stated that the proposal exposes 
representatives to safety risks, including, e.g., identity theft, data 
security incidents,\72\ financial fraud, kidnapping, black mail and 
extortion.\73\ One commenter expressed concerns that disclosure of 
recruitment compensation will make a representative's compensation a 
factor when customers are considering the settlement of outstanding 
complaints and negotiating settlement offers.\74\ Two commenters 
further stated that firms will be unable to protect widespread 
dissemination of a representative's compensation information once it is 
disclosed.\75\ One commenter suggested including with the proposed 
disclosure a customer confidentiality provision with an exception for 
the customer to share the information with an attorney or financial 
professional for consulting purposes.\76\ One commenter noted that the 
information gained by the disclosure will eventually be obtained and 
aggressively used by the previous firm to try to persuade clients not 
to follow their representatives to the new firm.\77\ Two commenters 
warned that the proposed disclosure would expose trade secrets and 
destroy proprietary business formulas that have been developed by 
firms.\78\ Another commenter stated that it threatens the confidential 
nature and success of firms' recruiting programs and impacts a core and 
currently proprietary tool that broker-dealers use to manage their 
business (i.e., compensation of personnel) without a measurable 
increase in customer protection or evidence that the disclosure will 
impact the perceived conflicts.\79\ Three commenters stated that the 
proposal could violate applicable state and federal privacy 
regulations, including the Gramm-Leach-Bliley Act and Regulation S-P, 
which are designed to protect the dissemination of non-public customer 
personal information.\80\ One commenter

[[Page 17602]]

encouraged FINRA to consider the operational challenges presented by 
the proposal, such as non-compete agreements and the prohibitions in 
Regulation S-P.\81\
---------------------------------------------------------------------------

    \72\ Cetera, Janney.
    \73\ FSI, Janney, SIPA.
    \74\ SIPA.
    \75\ Ameriprise, Janney.
    \76\ Miami.
    \77\ Burns.
    \78\ Janney, Miami.
    \79\ Sutherland.
    \80\ FSI, Janney, Taylor English.
    \81\ Sutherland.
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    FINRA believes that many of the privacy concerns noted by 
commenters are reduced by the proposed rule change that would provide 
for simplified and less specific disclosure of recruitment compensation 
in ranges. FINRA believes that the proposed disclosure of ranges of 
compensation and affirmative cost and portability disclosures, 
collectively, strike an appropriate balance to alleviate privacy and 
anti-competitive concerns, while providing customers with important 
information upon which to base a decision to transfer assets to a new 
firm. FINRA does not agree with the commenters that stated that there 
is no benefit or significant policy reason to provide recruitment 
compensation disclosure to former customers of a transferring 
representative. FINRA believes that receiving lucrative financial 
incentives that are often based on the amount of assets that will 
transfer with a representative to a new firm or the representative's 
trailing 12 creates a conflict of interest when a member, directly or 
through that representative, attempts to induce the owners of such 
assets to transfer them to the new firm. The representative's interest 
in receiving recruitment compensation may not align with the customer's 
best interest as to where to maintain his or her assets. FINRA believes 
that the investor protection benefits of providing this important 
information to former customers to inform their decision whether to 
transfer assets to their representative's new firm outweigh any 
remaining privacy issues that may arise under the proposed rule change.
    In addition, FINRA does not agree that the proposal to require 
disclosure of ranges of recruitment compensation to former customers 
would encourage violations of federal or state privacy regulations 
because it does not require the disclosure of any information related 
to non-public customer personal information. With respect to 
commenters' concerns regarding non-compete agreements and the 
prohibitions in Regulation S-P, FINRA notes that the proposed rule 
change should not 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.\82\ 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 for Broker Recruiting.\83\
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    \82\ See 17 CFR 248.15(a)(7)(i).
    \83\ The Protocol for Broker Recruiting (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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Anti-Competitive Consequences of the Notice Proposal
    The Notice Proposal solicited comment on whether the proposal will 
affect business practices and competition among firms with respect to 
recruiting and compensation practices. Many commenters stated that a 
general disclosure is preferable to specific disclosure of recruitment 
compensation because specific disclosure may have anti-competitive 
consequences.\84\ Two of these commenters noted that the proposal is an 
indirect restraint on trade and suppresses fair competition 
inconsistent with the requirements of a registered securities 
association under the Exchange Act.\85\ Numerous commenters stated that 
the proposal may constructively operate as a restrictive covenant not 
to compete if representatives are essentially restrained from 
transitioning to a new firm because of disclosures that are applicable 
only to their industry, which may result in a representative remaining 
with a less competitive or unethical firm.\86\ Two commenters noted 
that the proposal will dampen innovation and harm customers.\87\ One 
commenter cautioned that the proposal could cripple the opportunities 
for representatives to merge and consolidate their practices and to be 
compensated for their expenses.\88\ Another commenter disagreed and 
stated that competition for talented representatives will not be 
affected by the proposal.\89\
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    \84\ Ameriprise, Cetera, Janney, Lax, Stifel, Sutherland, 
Wedbush.
    \85\ Cetera, Janney.
    \86\ Burns, Burke, Elzweig, Janney, Smith Moore, Steiner, 
Stifel, Taylor, Wilson.
    \87\ Burns, Elzweig.
    \88\ Capstone-AG.
    \89\ UBS.
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    Three commenters noted that the proposal deepens the regulatory gap 
between broker-dealers and registered investment advisers and posited 
that it could have the result of driving representatives into the 
registered investment adviser business.\90\ One commenter suggested 
that FINRA work with the Commission and the states to adopt similar 
disclosure requirements for registered investment advisers so that 
representatives who switch to an adviser firm will also be subject to 
the proposed disclosure requirements.\91\
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    \90\ Ameriprise, FSI, Janney.
    \91\ WFA.
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    FINRA believes that representatives should have the freedom to 
transfer firms for any business reason. The proposed rule change is not 
designed to obstruct representatives from moving to a situation that 
better suits their needs and the needs of their customers. FINRA does 
not believe that the proposed rule change will prevent representatives 
from transferring firms by simply requiring the disclosure of key 
information that a former customer should consider before making a 
decision to move his or her assets to a new firm. Further, the proposed 
disclosure of recruitment compensation ranges is less intrusive than 
the more specific requirements of the Notice Proposal and should cure 
many of the concerns that the proposed rule change would be anti-
competitive. Based on consultation with FINRA's advisory committees and 
discussions with member firms, FINRA does not anticipate that industry-
wide uniform disclosure of recruitment compensation of $100,000 or more 
for each category of recruitment compensation will have the effect of 
stalling representatives' movement between firms. With respect to 
commenters' concerns regarding the disparate treatment of registered 
investment advisers under the proposed rule, FINRA notes that 
registered investment advisers are subject to the oversight of the SEC 
pursuant to the Investment Advisers Act of 1940 and a disclosure regime 
established by the Form ADV (Uniform Application for Investment Adviser 
Registration).\92\
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    \92\ See Form ADV, Section 2B, Item 5 (Additional Compensation): 
``If someone who is not a client provides an economic benefit to the 
supervised person for providing advisory services, generally 
describe the arrangement. For purposes of this Item, economic 
benefits include sales awards and other prizes, but do not include 
the supervised person's regular salary. Any bonus that is based, at 
least in part, on the number or amount of sales, client referrals, 
or new accounts should be considered an economic benefit, but other 
regular bonuses should not.''
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Disclosure Is Misleading to Customers Without Context
    Two commenters questioned the value of the proposed disclosure 
without any context to explain the justification and basis for the

[[Page 17603]]

recruitment compensation arrangement.\93\ Two other commenters stated 
that customers may think that the amount is a measure of the new firm's 
endorsement of the representative.\94\ Commenters also noted that 
customers will not be able to fully understand a recruitment package 
without having a full picture of all the factors involved, including, 
among other things, the risks and costs of a transition,\95\ personal 
reasons for a move,\96\ lost revenues suffered during the transition 
and first months at a new firm, and without relative frames of 
reference regarding the representative's compensation, such as the size 
of the representative's book of business or average annual 
revenues.\97\ Other commenters stated that customers are not 
experienced enough to know the right questions to ask or the proper due 
diligence to perform without context, including, among other things, 
that the arrangement may involve minimum customer asset transfer 
amounts or minimum revenue amounts attached to asset transfers for 
payments to fully vest.\98\ One commenter asked whether the disclosure 
may be accompanied by a statement explaining the other factors 
considered when making the move to the new firm, such as the 
availability of research and market analysis.\99\ Three commenters 
noted that there are many reasons why a representative will move firms 
so the financial incentives received should not call into question the 
motivation behind such a move or serve as an indication that the move 
was for any other reason than in the best interest of clients.\100\
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    \93\ MarketCounsel, Taylor English.
    \94\ Burns, Elzweig.
    \95\ Cutter, Smith Moore.
    \96\ Noble.
    \97\ Bischoff, Burns, Wedbush.
    \98\ Capstone-FA, Plexus.
    \99\ LaBastille.
    \100\ Janney, NAIFA, Summit-B.
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    FINRA believes it appropriate to allow a member to provide context 
to inform a former customer's decision-making process and enhance his 
or her understanding of recruitment compensation arrangements, and 
other considerations such as costs, fees and portability issues that 
may impact the customer. Therefore, FINRA plans to include on the 
FINRA-developed disclosure template a free text section in which a 
member or representative may choose to include contextual information 
to explain the reasoning and basis for the recruitment compensation 
package and information regarding costs, fees and portability issues 
that may impact the former customer. FINRA believes that any 
information that may clarify the disclosures is appropriate so long as 
it is not misleading.
Notice Proposal Is Too Broad
    Four commenters suggested that the proposal should exclude 
transition assistance designed solely to help offset the costs incurred 
by representatives to switch firms.\101\ One commenter requested that 
transition assistance associated with loss of insurance renewals due to 
vesting restrictions be excluded from the proposed disclosure 
requirement.\102\ Two commenters questioned the need for a disclosure 
requirement for asset-based recruitment compensation.\103\ One 
commenter recommended that FINRA incorporate an exception in the 
proposed rule for firms that do not include commission targets as part 
of enhanced compensation arrangements.\104\ Some commenters also noted 
that the proposal should be narrowed to include only compensation that 
presents a material conflict of interest \105\ or FINRA should prohibit 
practices deemed to have greater conflicts of interest, e.g., bonuses 
tied to commission or revenue goals and enhanced payout 
arrangements.\106\ One commenter stated that enhanced compensation 
means something different to a wirehouse representative than transition 
assistance for a representative in an independent broker-dealer model 
who employs a staff, has mortgage payments on leased commercial space, 
and may take three or more months to get the business up and 
running.\107\
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    \101\ Commonwealth, NAIFA, Summit-B, Summit-E.
    \102\ Summit-E.
    \103\ Burns, Sutherland.
    \104\ Summit-E.
    \105\ Commonwealth, FORM, Herskovits, Lincoln, LPL, Sutherland.
    \106\ Wedbush.
    \107\ Ameriprise.
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    FINRA believes the proposed rule change to require disclosure of 
recruitment compensation ranges beginning at $100,000 as applied 
separately to aggregate upfront payments and aggregate potential future 
payments would establish a threshold that would exclude many payments 
intended only to cover transition assistance, such as relocation and 
various overhead costs (e.g., office equipment, new business cards and 
letterhead). FINRA believes amounts above that threshold, particularly 
those based on a representative's trailing 12, are properly included in 
the disclosure requirement, as they are significant enough to bear on 
the representative's motivation to move firms and may prompt questions 
by former customers based on a review of their account activity. FINRA 
also notes that the proposed rule change would permit members to net 
out any increased costs incurred directly by the registered person in 
connection with transferring to the member in calculating whether a 
threshold is met.
    With respect to commenters' suggestion that asset-based recruitment 
compensation be excluded from the proposed rule change, FINRA does not 
agree. FINRA believes that asset-based recruitment packages present the 
same level of conflicts of interest when a member or a representative 
attempts to induce a former customer to transfer assets to the member 
because the representative's interest in asset gathering at the new 
firm may not align with the customer's best interest as to where to 
maintain those assets. As noted in Item A., most recruitment 
compensation packages are based, in part, on a representative's asset 
levels at his or her previous firm and members take these numbers into 
consideration when calculating recruitment compensation packages with 
an understanding that many of the representative's former customers 
will follow their representative to a new firm.
De Minimis Exception
    The Notice Proposal included an exception to the disclosure 
requirement for recruitment compensation of less than $50,000. The 
proposal requested comment on whether FINRA should establish an amount 
different from the proposed $50,000 for a de minimis exception. One 
commenter supported the $50,000 de minimis proposal, asserting that it 
was reasonable, would significantly reduce the burden for firms that 
pay only true transition assistance, and would allow firms to cover a 
representative's out of pocket expenses in many cases without 
triggering disclosure.\108\ Several commenters stated that $50,000 is 
an arbitrary and nominal threshold.\109\ Some commenters stated that 
the proposed de minimis was too low a threshold amount to cover the 
substantial costs incurred by representatives who transition 
firms.\110\ Two of these commenters suggested that the de minimis 
exception should be raised to

[[Page 17604]]

$100,000 or higher.\111\ Other commenters thought the $50,000 
disclosure was too high and suggested a $25,000 de minimis 
exception.\112\ Others suggested an alternative to the $50,000 de 
minimis amount that would require disclosure of any recruitment 
compensation that exceeds a certain percentage of the previous 12-month 
calendar year commissions.\113\ One commenter asked if FINRA considered 
account transfer and registration costs when establishing the de 
minimis exception.\114\ A few commenters warned that firms may 
restructure arrangements and use the de minimis exception as a means to 
avoid disclosure.\115\ Two commenters ask how the de minimis exception 
would be calculated in cases of unspecified dollar amounts at the time 
of transfer, such as covering transfer costs and deferred 
incentives.\116\
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    \108\ HDVest.
    \109\ Commonwealth, Cutter, FSI, Lax, Smith Moore, Summit-B, 
Summit-E.
    \110\ Commonwealth, Lax, NAIFA, Wedbush.
    \111\ NAIFA, Wedbush.
    \112\ PIABA, UBS.
    \113\ Commonwealth, Korth, Summit-B, Summit-E.
    \114\ Taylor English.
    \115\ Lax, Miami, Showalter.
    \116\ NAIFA, Taylor English.
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    In response to the comments, FINRA revised the proposal to include 
an effective de minimis exception for any recruitment compensation in 
an amount less than $100,000, as applied separately to aggregate 
upfront payments and aggregate potential future payments. In addition, 
the proposed rule change permits members to net out from the 
calculation of recruitment compensation (and total compensation for 
purposes of reporting to FINRA) any increased costs incurred directly 
by the representative in connection with transferring to the member. 
FINRA believes that the combination of raising the de minimis amount 
and allowing firms to net out costs directly incurred by a 
representative in a transfer addresses many of the commenters' 
concerns.
    With respect to the comments regarding how the de minimis exception 
would be calculated in cases of unspecified dollar amounts at the time 
of transfer, such as covering transfer costs and deferred incentives, 
FINRA notes that the proposed rule change includes supplementary 
material that clarifies that the member must assume that all 
performance-based conditions on the compensation are met and may make 
reasonable assumptions about the anticipated gross revenue to which an 
increased payout percentage will be applied.
Notice Proposal Should Be Expanded
    Numerous commenters questioned why FINRA singled out recruitment 
compensation when it is just one piece of a total compensation package 
offered by a recruiting firm.\117\ Such commenters noted that isolating 
recruitment compensation for inspection by customers is misleading 
because it does not present a conflict of interest significantly 
greater than other incentives offered in the ordinary course of 
business or in the form of retention bonuses and other compensation. 
One commenter recommended that firms report to FINRA their recruitment 
compensation, retention compensation and other incentives, and FINRA 
can determine whether a compensation package is justified.\118\ One 
commenter noted that the proposal seemed unnecessarily limited by 
excluding such benefits as new territories, new titles, and new high 
net worth customers.\119\ Another commenter suggested that FINRA 
require disclosure of additional gross compensation paid to the 
representative when it is more than 15 percentage points higher than a 
representative received at his or her previous firm.\120\
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    \117\ BDA, Bischoff, Burke, Burns, Capstone-AG, FORM, FSI, 
MarketCounsel, Miami, Lincoln, NAIFA, NASAA, Smith Moore, Steiner, 
Taylor English, WFA.
    \118\ Smith Moore.
    \119\ Plexus.
    \120\ Korth.
---------------------------------------------------------------------------

    One commenter suggested that FINRA consider the fair dealing 
obligations of the representative's former firm when communicating with 
a representative's clients about staying with the firm because they may 
offer financial incentives to retain the accounts.\121\ One commenter 
noted that many current employee contracts are full of deterrent and 
non-compete provisions that can also be seen as conflicts of 
interest.\122\ In addition, one commenter noted that branch managers 
may be paid a bonus six to nine months after a representatives departs 
a firm based on the amount of assets that did not follow the 
representative to his or her new firm.\123\ Another commenter stated 
that firms should be required to disclose when they terminate 
representative payouts thus incentivizing the representative to look 
for new opportunities.\124\
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    \121\ WFA.
    \122\ Spartan.
    \123\ Burns.
    \124\ Showalter.
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    FINRA understands the commenters' concerns that the proposal does 
not require disclosure of retention bonuses and other incentive 
compensation to customers. With the proposed rule change, FINRA is 
primarily concerned with providing customers impactful information to 
consider when deciding whether to transfer assets to a representative's 
new firm. Therefore, in response to these comments, FINRA has focused 
more narrowly on the costs and conflicts associated with that decision 
by a customer. FINRA notes that incentives offered while the 
representative is situated at a firm do not implicate the same 
considerations, such as transfer costs and portability issues.
    However, FINRA is interested in how compensation packages may be 
influencing representatives and their sales practice activities, so it 
is proposing a requirement that members report to FINRA at the 
beginning of the employment or association of a representative that has 
former customers if the member reasonably expects the total 
compensation paid to the representative by the member during the 
representative's first year of employment or association with the 
member to result in an increase over the representative's prior year 
compensation by the greater of 25% or $100,000. In determining total 
compensation, the member must include any aggregate upfront payments, 
aggregate potential future payments, increased payout percentages or 
other compensation the member reasonably expects to pay the 
representative during the first year of employment or association with 
the member. FINRA will review the proposed rule within an appropriate 
period after its approval and implementation to determine whether it is 
achieving its intended purpose and whether it is having unintended 
effects. As part of that review, FINRA will determine whether to 
eliminate the reporting requirement if the information is not useful, 
or expand it to other material increases in compensation, such as 
retention bonuses, that may result in increased risk to customers.
    One commenter stated that the proposal should more clearly spell 
out for customers the practical and personal impacts of the potential 
conflicts to permit an informed decision about whether to transfer 
assets to the representative's new firm.\125\ Another commenter 
suggested that investors should have answers to questions such as 
whether: (1) Products and services can be transferred to the new firm; 
(2) the investor will have to pay fees to the old or new firm to make a 
transition; or (3) the recruitment compensation package involves sales 
targets or other

[[Page 17605]]

incentives that may impact their accounts.\126\ The proposed rule 
change addresses these comments by requiring disclosure to former 
customers if transferring the former customer's assets to the member 
will result in costs to the former customer, such as account 
termination or account transfer fees from the former customer's current 
firm or account opening or maintenance fees at the member, that will 
not be reimbursed by the member, and if any of the former customer's 
assets are not transferable to the member and that the former customer 
may incur costs, including taxes, to liquidate and transfer those 
assets to the member or inactivity fees to leave those assets with the 
former customer's current firm. In addition, the proposed rule would 
require disclosure of the basis of any aggregate upfront payments and 
aggregate potential future payments received, or to be received, of at 
least $100,000 by the representative. FINRA believes such disclosure 
will prompt a dialogue between former customers and their 
representatives about the impacts the structure and magnitude of a 
recruitment package may have had on their accounts at the previous 
firm, and may have on an account at the recruiting firm if the customer 
decides to transfer assets.
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    \125\ SIFMA.
    \126\ Edward Jones.
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Disclosure at First Contact With a Former Customer
    The Notice Proposal required disclosure of the details of the 
enhanced compensation to be made orally or in writing at the time of 
first individualized contact by the member or representative with the 
former customer after the representative has terminated his or her 
association with the previous firm. If the disclosure was made orally, 
the recruiting firm also would have been required to provide the 
disclosure in writing to the former customer with the account transfer 
approval documentation. When individualized contact with that former 
customer had not occurred and the customer sought to transfer an 
account from the previous firm to a broker-dealer account assigned to 
the representative with the recruiting firm, the recruiting firm also 
would have been required to provide the disclosure in writing to the 
former customer with the account transfer approval documentation. The 
Notice Proposal asked for comment on whether the proposed rule should 
require written disclosure at first individualized contact in all 
instances, rather than allowing oral disclosure.
    Many commenters opposed the proposal to require oral disclosure of 
recruitment compensation at the time of first individualized contact by 
the member or the representative, contending that such a requirement is 
unworkable and would present significant tracking and supervisory 
challenges for recruiting firms.\127\ One commenter supported oral 
disclosure at first contact in lieu of written disclosure, stating that 
written disclosure at first contact is not practical from a business 
standpoint, jeopardizes the representative's move to the new firm, 
delays the transfer, and is a segmented approach.\128\ Two commenters 
requested clarification that the requirement is limited to the initial 
contact that relates to the former client's transfer of an account and 
not an announcement of the representative's new employment.\129\
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    \127\ Advisor Group, Cetera, Cutter, Merrill, Miami, PIABA, 
Showalter, Summit-B, Taylor English, WFA.
    \128\ Summit-E.
    \129\ Ameriprise, Gehring.
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    The proposed rule change retains the requirement to provide oral 
disclosures to a former customer when a member or representative makes 
individualized oral contact to attempt to induce the former customer to 
transfer assets to the member. FINRA believes that the administrative 
and tracking challenges of oral disclosure asserted by commenters do 
not outweigh the value in providing disclosures at the time of first 
individualized contact because it is the point at which a customer 
begins the decision-making process on whether to follow a 
representative to a new firm. FINRA does not believe that setting up 
policies and procedures to supervise a registered person's 
communications with former customers presents an unreasonable burden to 
members. Members already are obligated to supervise representatives' 
communications with customers and have flexibility to design their 
supervisory systems. FINRA notes that the commenters did not provide 
specific data to support their contention that oral disclosure at first 
individualized contact would be unworkable for recruiting firms.
    Under the proposed rule, FINRA would consider a phone call to a 
former customer announcing a representative's new position with the 
member to qualify as first individualized contact and an attempt to 
induce the former customer to transfer assets to the member even when 
the conversation is limited to an announcement. Therefore, the proposed 
disclosures must be provided orally during the phone call and must be 
followed by written disclosures sent within 10 business days from such 
oral contact or with the account transfer approval documentation, 
whichever is earlier.
    One commenter supported written disclosure at first individualized 
contact, noting that disclosure may be overlooked by a customer if 
written disclosure is not required until the account transfer 
documentation.\130\ Several commenters objected to the proposal to 
require written disclosure at first individualized contact, stating 
that it is impractical and interferes with the representative's ability 
to timely contact customers.\131\ These commenters suggested instead 
that written disclosure be required at or prior to account opening 
because it gives customers an opportunity to comprehensively review the 
disclosure.
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    \130\ PIABA.
    \131\ Commonwealth, Lax, Merrill, Summit-B, Summit-E, Taylor 
English, UBS, WFA.
---------------------------------------------------------------------------

    The proposed rule change retains the requirement to provide written 
disclosures at the time of first individualized contact with a former 
customer if such contact is in writing. FINRA believes disclosure at 
first individualized contact is more effective than disclosure at or 
prior to account opening because customers typically have already made 
the decision to transfer assets by that point in the process. FINRA 
does not believe that it is particularly burdensome to require members 
to include as part of a written communication to former customers a 
disclosure form that includes key information for the customer to 
consider in making a decision to transfer assets to a new firm. In 
addition, FINRA believes that the information required by the proposed 
disclosures should be accessible to the recruiting firm and the 
representative at the time first contact is made by the recruiting form 
or the representative. The proposed rule change provides that a 
recruiting firm may rely on the reasonable representations of the 
representative, supplemented by the actual knowledge of the recruiting 
firm, in determining whether a disclosure must be made to a former 
customer. If after considering the representations of the newly hired 
representative, the firm cannot make a determination regarding the 
portability of a former customer's products, the firm must advise 
former customers in the disclosure to ask their current firm whether 
any of their securities account assets will not transfer and what 
costs, if any, the customers will incur to liquidate and transfer such 
assets or

[[Page 17606]]

keep them in an account with their current firm. The firm must further 
disclose that nontransferable securities account assets will be 
identified to the former customer in writing prior to, or at the time 
of, validation of the account transfer instructions.
    The Notice Proposal also solicited comment on whether the proposal 
should require a representative to disclose specific amounts of 
recruitment compensation to any customer individually contacted by the 
representative regarding such transfer while the representative is 
still at the previous firm. Numerous commenters objected to such a 
requirement while the representative is still at the previous 
firm,\132\ suggesting that it would be unworkable from an operational 
and supervisory standpoint,\133\ unnecessary to fulfill the goals of 
the proposal,\134\ would interfere with the representative's ability to 
give notice to the firm, and may violate existing statutory or 
contractual obligations to the firm.\135\ Based on the comments, FINRA 
did not incorporate such a requirement in the proposed rule change. 
However, if FINRA finds that representatives are contacting former 
customers before association or employment with the new firm as a way 
to avoid making the disclosures required by the proposed rule, FINRA 
will consider future rulemaking in this area.
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    \132\ Advisor Group, Ameriprise, Cetera, Lax, Taylor English, 
SIFMA, UBS, Wedbush, WFA.
    \133\ Ameriprise, SIFMA.
    \134\ Taylor English, WFA.
    \135\ Lax.
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One-Year Disclosure Period
    The Notice Proposal would have required the proposed disclosure to 
former customers for one year following the date the representative 
associates with the recruiting firm. The Notice Proposal requested 
comment on whether the proposal should apply a different time period. 
Commenters had mixed views on the issue. Three commenters supported the 
proposed disclosure period of one year following the date the 
representative associates with the recruiting firm.\136\ Four 
commenters recommended that the disclosures should apply for the period 
that the representative is receiving enhanced compensation.\137\ Two 
commenters recommended a disclosure period of 90 days from the date the 
representative associates with the new firm \138\ and one commenter 
recommended 90 to 180 days from such date.\139\ One commenter suggested 
a disclosure period of six months to one year from the date of hire 
because most representatives contact their clients within the first six 
months of employment.\140\ Another commenter stated that the one-year 
time period is arbitrary and seems extensive based on typical transfer 
time.\141\
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    \136\ Summit-B, UBS, WFA.
    \137\ Cornell, Miami, PIABA, Ruchin.
    \138\ Commonwealth, Sutherland.
    \139\ Summit-E.
    \140\ Wedbush.
    \141\ Cutter.
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    The proposed rule change retains the proposed requirement for 
disclosure to former customers for a period of one year following the 
date the representative begins employment or associates with a member. 
As noted in Item B., FINRA understands that most customers who transfer 
assets to the recruiting firm do so soon after the representative 
changes firms so the one-year period should be sufficient to ensure 
that virtually all former customers that the recruiting firm or 
representative attempt to induce to transfer assets to the recruiting 
firm receive the disclosure. FINRA is not proposing a shorter time 
period for the proposed disclosures because it also understands it may 
take some former customers longer to make a determination to transfer 
assets to the representative's new firm, particularly if such customer 
is initially hesitant about transferring assets to the new firm. FINRA 
believes the disclosure information is equally relevant for customers 
that wait some time to consider transferring assets to the new firm and 
that one year is a reasonable cutoff. FINRA believes the burden of 
compliance should diminish over the year period, consistent with early 
efforts to induce former customers to transfer their assets.
Who Should Receive Disclosure
    The Notice Proposal would have required disclosure to any former 
customer with an account assigned to the representative at the previous 
firm who is individually contacted by the recruiting firm or 
representative, either orally or in writing, regarding the transfer of 
the securities employment (or association) of the representative to the 
recruiting firm; or seeks to transfer an account from the previous firm 
to a broker-dealer account assigned to the representative with the 
recruiting firm. The Notice Proposal requested comment on whether the 
proposal should apply to all customers recruited by the transferring 
representative during the year after transfer. FINRA also asked for 
comment on whether it should apply to any new broker-dealer account 
assigned to the representative with the recruiting firm opened by a 
former customer of the representative in addition to accounts 
transferring from the previous firm.
    Commenters were split on who should receive the proposed disclosure 
of specific compensation. One set of commenters suggested that the 
proposal should focus on the conflict that exists when a representative 
asks a former customer to move to the recruiting firm, so only former 
customers should receive the disclosure.\142\ Another set of commenters 
stated that all clients, including new clients at the recruiting firm, 
should receive the proposed disclosure.\143\ One commenter stated that 
the proposal should be expanded beyond retail customers to include 
institutional customers, because their asset levels make them 
particularly susceptible to misconduct aimed at increasing a 
representative's production.\144\
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    \142\ Commonwealth, Cutter, NAIFA, Summit-B, Summit-E, 
Sutherland, UBS.
    \143\ Cornell, Miami, PIABA, Ruchin.
    \144\ Miami.
---------------------------------------------------------------------------

    The proposed rule change would apply to customers that meet the 
definition of a ``former customer'' under the proposed rule. This would 
include any customer that had a securities account assigned to a 
representative at the representative's previous firm and 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 any natural person would not qualify for the 
``institutional account'' exception. FINRA agrees with the commenters 
that suggested that the proposed rule change should address the 
conflict that exists when a representative attempts to induce a former 
customer to move assets to the recruiting firm. FINRA believes that 
former customers that a member or representative attempts to induce to 
transfer assets to a new firm are most vulnerable in recruitment 
situations because they have already developed a trusting relationship 
with the representative and because their assets may be both the basis 
for the representative's recruitment compensation (if the 
representative's upfront payments and potential future payments are 
asset-based or production-based) and subject to potential costs and 
changes if the customer decides to move those assets to the recruiting 
firm. FINRA did not extend the application of the proposed rule to non-
natural person institutional accounts because it believes that such 
accounts are more sophisticated in their dealings with

[[Page 17607]]

representatives and that the proposed disclosure would not have as 
significant an impact on their decision whether to transfer assets to a 
new firm.
Customer Affirmation
    The Notice Proposal also requested comment on whether the proposed 
rule should include a requirement that a customer affirm receipt of the 
disclosure regarding recruitment compensation at or before account 
opening at the new firm. FINRA was interested, in particular, in the 
potential for such a requirement to delay the account opening process 
in a manner that could disadvantage customers. A majority of the 
commenters that responded to this request opposed a customer 
affirmation requirement because it would cause delays in the account 
opening and transfer process, create an additional layer of tracking, 
review and approval to members' operations, may disadvantage clients, 
and would impose costs and an undue burden on members.\145\ Two 
commenters supported a requirement for written customer affirmation and 
suggested using a standard form in the new account paperwork that would 
not be overly burdensome to members.\146\
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    \145\ Cetera, Janney, NAIFA, Taylor English, Wedbush.
    \146\ Cornell, Summit-E.
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    The proposed rule change does not incorporate a written customer 
affirmation requirement. FINRA believes that the requirements to 
provide disclosure at the time of first individualized contact with a 
former customer, to follow up in writing if such contact is oral, and 
to deliver the disclosures with the account transfer approval 
documentation when no individual contact is made, will ensure that 
former customers receive and have an opportunity to review the proposed 
disclosure before they decide to transfer assets to a new firm. At this 
time, FINRA does not believe that a customer affirmation is necessary 
to accomplish the goals of the proposed rule change, especially in 
light of commenters' concerns that such a requirement may delay the 
account opening and transfer process. FINRA will assess the 
effectiveness of the disclosure requirement without a customer 
affirmation requirement following implementation of the proposed rule. 
If FINRA finds that the proposed disclosures alone are not attracting 
the attention of customers to influence their decision-making process, 
then it will reconsider a customer affirmation requirement.
Economic Impacts of the Notice Proposal
    The Notice Proposal requested comments on the economic impact and 
expected beneficial results of the proposed rule. Specifically, FINRA 
asked for comment on what direct costs for the recruiting firm will 
result from the rule, and what indirect costs will arise for the 
recruiting firm or its transferring persons. Three commenters stated 
that the proposal will generate significant administrative challenges 
and implementation costs for firms and representatives, including 
additional paperwork and forms, tracking mechanisms, training, and new 
policies and procedures.\147\ Two commenters stated that there will be 
initial implementation costs, but they are warranted to elevate 
industry standards and provide better information to clients before 
they transfer their accounts to a new firm.\148\ One commenter stated 
that the disclosure can be included with new account documentation so 
it will not delay the account transfer process or impose significant 
costs on firms.\149\ One commenter suggested that FINRA should conduct 
a cost-benefit analysis of the proposal that assesses the impact not 
only on customers, but also the attendant impact on representatives, 
firms, and restraints on trade.\150\ Two commenters asked whether the 
proposal would include an obligation to disclose modifications to 
recruitment compensation packages with an updated disclosure to former 
customers who have already transferred assets to the recruiting 
firm.\151\
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    \147\ Advisor Group, Summit-E, Sutherland.
    \148\ Edward Jones, UBS.
    \149\ Cornell.
    \150\ Janney.
    \151\ Cetera, Taylor English.
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    Despite a request for quantitative comments, the commenters that 
stated that the proposal will generate significant administrative 
challenges and implementation costs did not provide specific costs or 
empirical data upon which to base their assertions. FINRA has given 
careful consideration to the economic impacts of the proposed rule 
change. It has considered the comments to the Notice Proposal, as well 
as feedback from its advisory committees, other industry members and 
the public. Based on the input received, FINRA does not believe that 
the proposed rule change will result in unsupportable administrative 
and implementation challenges for members. As with most rule changes, 
the proposed rule change would likely require updates to members' 
systems and procedures; however, FINRA believes the burden of such 
updates are outweighed by the significant benefit to retail investors 
in receiving key information relevant to a decision to transfer their 
assets to a new firm and the benefit to FINRA's risk-based examination 
process by receiving information related to significant increases in a 
representative's compensation in the first year at a recruiting firm.
    As discussed in Item B., FINRA has made several changes to the 
Notice Proposal that will assist members and reduce the burdens of 
compliance: Among other things, the proposed rule change includes a 
$100,000 de minimis exception that applies separately to aggregate 
upfront payments and aggregate potential future payments, allows 
members to net out costs paid to a representative as reimbursement for 
direct costs incurred by a representative in a move, includes a FINRA-
developed disclosure template, and allows disclosure of recruitment 
compensation ranges instead of specific amounts to protect the privacy 
of transferring representatives. In addition, members may rely on the 
reasonable representations of a representative regarding the cost and 
portability disclosures and, although such disclosures must be 
affirmative as they relate to each former customer's assets, the 
disclosures do not have to be specific as to the amount of costs or 
products that will not transfer.
    With respect to the commenters' question regarding disclosure of 
modifications to a representative's recruitment compensation package, 
FINRA is not aware that recruitment packages typically are modified 
after a recruited representative has associated with the recruiting 
firm. To the extent that practice occurs and is not designed to 
circumvent the requirements of the proposed rule, the proposed rule 
change would not require any such modifications to be disclosed to 
customers that have already transferred their accounts. FINRA notes 
that the proposed rule is focused on a former customer's decision to 
transfer assets to the recruiting firm. A modification to the 
recruitment package cannot affect the decisions of customers that have 
already transferred assets (unless they have additional assets that 
could still be transferred). However, FINRA cautions that any aspects 
of the recruitment package that were agreed upon prior to the 
representative associating with the recruiting firm--including any 
modifications that would take effect at a later date--would be 
considered either upfront or potential future payments for

[[Page 17608]]

the purposes of the disclosure obligation.
Small Firms Concerns
    The Notice Proposal solicited comment on whether the impacts of the 
proposal with respect to changes in business practices and recruiting 
efforts differentially will affect small or specialized broker-dealers. 
Six commenters stated that compliance with the proposal will be more 
difficult for small firms with limited operational resources and 
supervisory personnel and will make recruiting efforts more 
challenging.\152\
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    \152\ Cetera, Gompert, Janney, Plexus, Summit-E, Whitehall.
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    In crafting the proposed rule change, FINRA considered its 
potential impacts on small firms and specialized broker-dealers. The 
proposed rule change provides for disclosure of recruitment 
compensation in ranges only for amounts of $100,000 or more, as applied 
to two separate categories of recruitment compensation. Based on input 
from members, including independent broker-dealers and small firms, 
FINRA believes that the $100,000 thresholds as applied separately to 
aggregate upfront payments and aggregate potential future payments for 
purposes of disclosure to former customers and the greater of 25% or 
$100,000 over the representative's prior year's compensation for 
purposes of reporting total compensation to FINRA will exclude most 
small firms and specialized broker-dealers from the proposed rule 
because such firms are not likely to offer recruitment compensation or 
total compensation packages that meet the proposed thresholds, 
particularly when, as permitted under the proposed rule, direct costs 
incurred by the representative in connection with the transfer are 
netted out from the calculation.\153\ FINRA believes that, to the 
extent that a small firm or specialized broker-dealer does pay the 
significant levels of recruitment compensation captured by the proposed 
rule change, their customers should similarly be provided the 
disclosure that will facilitate an informed decision as to whether to 
transfer assets to the representative's new firm. FINRA also is 
proposing disclosure to former customers via a FINRA-developed template 
that would save all members, small and large, from the resources, 
administration and costs related to developing a disclosure form that 
would meet the requirements of the proposed rule.
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    \153\ See proposed FINRA Rule 2243.04.
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Alternatives Suggested
    One commenter recommended that FINRA adopt a rule that would 
prohibit recruitment compensation over $100,000 to level the recruiting 
playing field among all members and eliminate potential or perceived 
conflicts of interest.\154\ Another commenter suggested that the 
disclosure should be given by the firm the representative is leaving 
and should be provided to all clients of the departing representative 
at the time of his or her resignation.\155\ A few commenters believed 
that placing the burden on firms to enhance their supervisory structure 
and develop comprehensive policies and procedures related to conflicts 
identification and disclosure would better serve the industry and 
investors.\156\ One commenter suggested that FINRA allow members to 
make their own business decisions and determine what is competitive and 
profitable for them regarding recruitment practices.\157\ Another 
commenter suggested amending the proposal to require the member to 
disclose compensation paid by its non-member affiliates to a 
transferring representative to avoid a loophole for dual-hatted 
representatives.\158\ One commenter asked FINRA to evaluate whether the 
proposed rule should apply to all client-facing professionals 
(investment bankers, institutional sales representatives, financial 
planners, sales traders) who receive recruitment compensation.\159\ Two 
commenters stated that recruiting firms should be required to send 
clients a FINRA-drafted pamphlet that flags issues related to 
transitions, so clients can make their own determination as to what 
information they consider important in evaluating whether they should 
follow their representative to a new firm.\160\
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    \154\ Wedbush.
    \155\ Oppenheimer.
    \156\ FSI, Janney, NASAA.
    \157\ Midwestern.
    \158\ Gehring.
    \159\ Janney.
    \160\ Burns, Miami.
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    As detailed in Item B., FINRA has considered numerous alternatives 
suggested by the commenters to the Notice Proposal but believes that 
the proposed rule change strikes an appropriate balance to increase 
transparency with respect to recruitment practices without creating 
unnecessary costs or burdens on members and their representatives. As 
to these commenters' suggestions, FINRA does not believe it appropriate 
to regulate the amount of recruitment compensation paid to 
representatives; rather, the proposed rule change seeks to provide 
disclosure related to compensation incentives to the extent it may 
impact a retail investor's decision whether to follow his or her 
representative to a new firm. FINRA believes the recruiting firm that 
is paying representatives recruitment compensation in amounts that meet 
the proposed thresholds is in the best position to provide the required 
disclosures. FINRA encouraged members in its Report on Conflicts of 
Interest to enhance their supervision of representative's activity 
around the time of compensation thresholds; \161\ however, the primary 
focus of the proposed rule change is to provide retail investors with 
important cost information and transparency of conflicts related to the 
decision whether to transfer assets to a representative's new firm. 
FINRA also notes that the proposed rule change would require disclosure 
of recruitment compensation paid by non-member affiliates to the extent 
those amounts, when combined with any recruitment compensation paid by 
the recruiting member, exceed the $100,000 thresholds for each category 
of recruitment compensation. The proposed rule change would apply to 
recruitment compensation paid to any registered person; however, FINRA 
notes that investment bankers and other types of registered persons not 
involved in retail sales are unlikely to have retail customers whose 
assets might be induced to transfer.
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    \161\ Report on Conflicts of Interest, FINRA, October 2013, 
available at, http://www.finra.org/web/groups/industry/@ip/@reg/@guide/documents/industry/p359971.pdf.
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    Finally, FINRA believes the more specific disclosure that would be 
required under the proposed rule change will appreciably benefit retail 
customers more than a general pamphlet that sets out considerations 
without providing the actual information related to those 
considerations. FINRA will continue to evaluate alternatives based on 
the comments received on the revised proposal.
Implementation and Requests To Delay Rulemaking
    Some commenters expressed concerns regarding the implementation of 
the proposal. Five commenters noted that due to the nature of some 
enhanced compensation arrangements (e.g., deferred incentives or 
modifications to a package) it will be difficult to calculate dollar 
amounts at the time of transfer.\162\ Two commenters requested guidance 
on how recruitment

[[Page 17609]]

compensation should be calculated and disclosed, by group or 
individual, where bonuses are given to a group of brokers and 
assistants who move to a new firm together.\163\ One commenter 
requested that FINRA allow adequate time for implementation.\164\ 
Another commenter suggested limiting the application of the rule to 
those hired after the rule goes into effect.\165\
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    \162\ Ameriprise, NAIFA, Summit-B, Sutherland, Taylor English.
    \163\ Cetera, LaBastille.
    \164\ Advisor Group.
    \165\ Gehring.
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    One commenter suggested that it would be prudent for FINRA to 
assemble a working group to collect qualitative information related to 
the use of recruitment compensation in the industry to make a well-
informed decision about how best to proceed in order to achieve its 
intended goals.\166\ One commenter noted that the proposal should 
consider FINRA's proposal in Regulatory Notice 10-54 (Disclosure of 
Services, Conflicts and Duties) and Section 919 of the Dodd-Frank 
Act,\167\ which grants permissive authority to the SEC to engage in 
rulemaking with respect to compensation practices, because a 
comprehensive review of the required disclosure regime for broker-
dealers would result in a more thoughtful, consistent and effective set 
of disclosures that would be most likely to benefit investors.\168\ 
Another commenter suggested that FINRA integrate the proposal with the 
pre-engagement disclosures contemplated in Regulatory Notice 10-
54.\169\ Two commenters recommended that FINRA delay further regulatory 
action until the conflicts initiative is completed.\170\ Finally, one 
commenter noted that FINRA should do a global conflicts assessment not 
limited to this isolated and singular conflict.\171\
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    \166\ FSI.
    \167\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Pub. L. No. 111-203, 124 Stat. 1376 (2010).
    \168\ Sutherland.
    \169\ FSI.
    \170\ Advisor Group, FSI.
    \171\ Janney.
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    FINRA believes that members are in a position to calculate 
recruitment compensation for purposes of the proposed disclosure 
requirement at the time a representative or the member attempts to 
induce a former customer of the representative to transfer assets to 
the representatives' new firm. FINRA notes that the representative will 
already be associated with or employed by the member, so all 
compensation arrangements between the representative and the member 
should be clear and agreed to by all parties. The proposed rule change 
also provides guidance with respect to calculating recruitment 
compensation and total compensation for the purpose of the proposed 
disclosure and reporting requirements, respectively: members must 
assume that all performance-based conditions on the representative's 
compensation are met, may make reasonable assumptions about the 
anticipated gross revenue to which an increased payout percentage will 
be applied and may net out any increased costs incurred directly by the 
registered person in connection with transferring to the member. With 
respect to a transfer of a group, or team, of representatives and 
staff, FINRA believes that members can make a reasonable determination 
regarding the application of recruitment compensation to each 
individual that transferred to the firm to make the required 
disclosures. FINRA will consider further guidance regarding application 
of the proposed rule change as issues arise.
    FINRA understands the commenters' suggestions to delay rulemaking 
and incorporate the proposed rule change into other ongoing efforts 
related to conflicts of interest. However, FINRA believes that the 
proposed rule change should move forward at this time, as it is 
narrowly focused on a retail investor's important decision whether to 
transfer assets to a new firm, rather than conflicts associated with 
compensation practices more broadly. FINRA believes that former 
customers should begin receiving the proposed disclosures as soon as 
practicable so that they are fully informed before making a decision to 
transfer assets to a representative's new firm. FINRA will consider how 
the proposed rule change fits within the larger scheme of conflicts of 
interest regulations as the timetables on such other proposals 
progress. In addition, FINRA will establish a reasonable implementation 
period for the proposed rule change to provide members with sufficient 
time to update their internal systems and policies.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml ); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2014-010 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2014-010. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml 
). Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE., Washington, 
DC 20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of FINRA. All comments received 
will be posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-FINRA-2014-010 and should be submitted 
on or before April 18, 2014.

[[Page 17610]]

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\172\
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    \172\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-06895 Filed 3-27-14; 8:45 am]
BILLING CODE 8011-01-P