Document ID: SEC-2016-0536-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2016-03-29T04:00Z

[Federal Register Volume 81, Number 60 (Tuesday, March 29, 2016)]
[Notices]
[Pages 17513-17520]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-06995]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77430; File No. SR-FINRA-2015-057]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change to Adopt FINRA 
Rule 2273 (Educational Communication Related to Recruitment Practices 
and Account Transfers)

March 23, 2016.

I. Introduction

    On December 16, 2015, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt FINRA Rule 2273, which 
would establish an obligation for a member to deliver an educational 
communication in connection with member recruitment practices and 
account transfers.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on December 30, 2015.\3\ The Commission received twelve 
comment letters on the proposal.\4\ On February 4, 2016, FINRA extended 
the time period for Commission action on the proposed rule change until 
March 29, 2016. On March 17, 2016, FINRA responded to

[[Page 17514]]

the comments.\5\ The proposed rule change is unchanged from the 
original proposal. This order approves the proposed rule change. The 
text of the proposed rule change is available on FINRA's Web site at 
http://www.finra.org, at the principal office of FINRA, on the 
Commission's Web site at http://www.sec.gov, and at the Commission's 
Public Reference Room.
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    \3\ See Notice of Filing of a Proposed Rule Change to Adopt 
FINRA Rule 2273 (Educational Communication Related to Recruitment 
Practices and Account Transfers), Exchange Act Rel. No. 76757 
(December 23, 2015), 80 FR 81590 (December 30, 2015) (``Notice'').
    \4\ Comment letters were submitted by Georgia State University 
College of Law Investor Advocacy Clinic (``GSU''); Commonwealth 
Financial Network (``Commonwealth''); Securities Industry and 
Financial Markets Association (``SIFMA''); Financial Services 
Institute (``FSI''); Public Investors Arbitration Bar Association 
(``PIABA''); Wells Fargo Advisors (``Wells Fargo''); The Committee 
of Annuity Insurers (``Committee of Annuity Insurers''); Lincoln 
Financial Network (``Lincoln''); LPL Financial (``LPL''); Raymond 
James Financial Services (``RJFS''); Raymond James & Associates 
(``RJA''); and HD Vest Investment Services (``HD Vest'').
    \5\ Letter from Jeanette Wingler, Assistant General Counsel, 
FINRA, to Brent J. Fields, Secretary, Commission, dated March 17, 
2016.
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II. Description of the Proposed Rule Change

Background

    FINRA is concerned that representatives who switch their member 
firm often contact former customers and emphasize the benefits the 
former customers would experience by following the representative and 
transferring their assets to the firm that recruited the registered 
representative (``recruiting firm'') and maintaining their relationship 
with the representative. In this situation, former customers' 
confidence in and prior experience with the representative may be one 
of the customers' most important considerations in determining whether 
to transfer assets to the recruiting firm. As stated in the Notice, 
FINRA is concerned that former customers may not be aware of other 
important factors to consider in making a decision whether to transfer 
assets to the recruiting firm, including direct costs that may be 
incurred. Therefore, to provide former customers with a more complete 
picture of the potential implications of a decision to transfer assets, 
the proposed rule change would require delivery of an educational 
communication by the recruiting firm that highlights key considerations 
in transferring assets to the recruiting firm, and the direct and 
indirect impacts of such a transfer on those assets.
    As stated in the Notice, FINRA believes that former customers would 
benefit from receiving a concise, plain-English document that 
highlights the potential implications of transferring assets. The 
proposed educational communication is intended to encourage former 
customers to make further inquiries of the transferring representative 
(and, if necessary, the customer's current firm), to the extent that 
the customer considers the information important to his or her decision 
making.

Educational Communication

    The proposed rule change would require a member that hires or 
associates with a registered representative to provide to a former 
customer of the representative, individually, in paper or electronic 
form, an educational communication prepared by FINRA. The proposed rule 
change would require delivery of the educational communication when: 
(1) The member, directly or through a representative, individually 
contacts a former customer of that representative to transfer assets; 
or (2) a former customer of the representative, absent individual 
contact, transfers assets to an account assigned, or to be assigned, to 
the representative at the member.\6\
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    \6\ See proposed FINRA Rule 2273(a).
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    The proposed rule change would define a ``former customer'' as any 
customer that had a securities account assigned to a registered person 
at the representative's previous firm. The term ``former customer'' 
would not include a customer account that meets the definition of an 
``institutional account'' pursuant to FINRA Rule 4512(c); provided, 
however, accounts held by a natural person would not qualify for the 
institutional account exception.\7\
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    \7\ See proposed FINRA Rule 2273.01 (Definition). FINRA Rule 
4512(c) defines the term institutional account to mean the account 
of: (1) A bank, savings and loan association, insurance company, or 
registered investment company; (2) an investment adviser registered 
either with the SEC under Section 203 of the Investment Advisers Act 
of 1940 or with a state securities commission (or any agency or 
office performing like functions); or (3) any other entity (whether 
a natural person, corporation, partnership, trust, or otherwise) 
with total assets of at least $50 million.
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    The educational communication focuses on important considerations 
for a former customer who is contemplating transferring assets to an 
account assigned to his or her former representative at the recruiting 
firm. The educational communication would highlight the following 
potential implications of transferring assets to the recruiting firm: 
(1) Whether financial incentives received by the representative may 
create a conflict of interest; (2) that some assets may not be directly 
transferrable to the recruiting firm and as a result the customer may 
incur costs to liquidate and move those assets or account maintenance 
fees to leave them with his or her current firm; (3) potential costs 
related to transferring assets to the recruiting firm, including 
differences in the pricing structure and fees imposed by the customer's 
current firm and the recruiting firm; and (4) differences in products 
and services between the customer's current firm and the recruiting 
firm.
    The educational communication is intended to prompt a former 
customer to make further inquiries of the transferring representative 
and recruiting firm (and, if necessary, the customer's current firm), 
to the extent that the customer considers the information important to 
his or her decision making.

Requirement To Deliver Educational Communication

    As stated in the Notice, FINRA believes that a broad range of 
communications by a recruiting firm or its registered representative 
would constitute individualized contact that would trigger the delivery 
requirement under the proposal.\8\ These communications may include, 
but are not limited to, oral or written communications by the 
transferring representative: (1) Informing the former customer that he 
or she is now associated with the recruiting firm, which would include 
customer communications permitted under the Protocol for Broker 
Recruiting (``Protocol''); \9\ (2) suggesting that the former customer 
consider transferring his or her assets or account to the recruiting 
firm; (3) informing the former customer that the recruiting firm may 
offer better or different products or services; or (4) discussing with 
the former customer the fee or pricing structure of the recruiting 
firm.
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    \8\ See Notice, supra note 3, 80 FR at 81591.
    \9\ The Protocol was created in 2004 and permits departing 
representatives to take certain limited customer information with 
them to a new firm, and solicit those customers at the new firm, 
without the fear of legal action by their former employer. The 
Protocol provides that representatives of firms that have signed the 
Protocol can take client names, addresses, phone numbers, email 
addresses, and account title information when they change firms, 
provided they leave a copy of this information, including account 
numbers, with their branch manager when they resign.
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    Furthermore, as stated in the Notice, FINRA would consider oral or 
written communications to a group of former customers to similarly 
trigger the requirement to deliver the educational communication under 
the proposed rule change.\10\ These types of oral or written 
communications by a member, directly or through the representative, to 
a group of former customers may include, but are not limited to: (1) 
Mass mailing of information; (2) sending copies of information via 
email; or (3) automated phone calls or voicemails.
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    \10\ See Notice, supra note 3, 80 FR at 81591.
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Timing and Means of Delivery of Educational Communication

    The proposed rule change would require a member to deliver the 
educational communication at the time of the first individualized 
contact with a former customer by the member,

[[Page 17515]]

directly or through the representative, regarding the former customer 
transferring assets to the member.\11\ If such contact is in writing, 
the proposed rule change would require the educational communication to 
accompany the written communication. If the contact is by electronic 
communication, the proposed rule change would permit the member to 
hyperlink directly to the educational communication.\12\
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    \11\ See proposed FINRA Rule 2273(b)(1).
    \12\ See proposed FINRA Rule 2273(b)(1)(A).
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    If the first individualized contact with the former customer is 
oral, the proposed rule change would require the member or 
representative to notify the former customer orally that an educational 
communication that includes important considerations in deciding 
whether to transfer assets to the member will be provided not later 
than three business days after the contact. The proposed rule change 
would require the educational communication be sent within three 
business days from such oral contact or with any other documentation 
sent to the former customer related to transferring assets to the 
member, whichever is earlier.\13\
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    \13\ See proposed FINRA Rule 2273(b)(1)(B).
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    If the former customer seeks to transfer assets to an account 
assigned, or to be assigned, to the representative at the member, but 
no individualized contact with the former customer by the 
representative or member occurs before the former customer seeks to 
transfer assets, the proposed rule change would mandate that the member 
deliver the educational communication to the former customer with the 
account transfer approval documentation.\14\ The educational 
communication requirement in the proposed rule change would apply for a 
period of three months following the date that the representative 
begins employment or associates with the member.\15\
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    \14\ See proposed FINRA Rule 2273(b)(2).
    \15\ See proposed FINRA Rule 2273(b)(3).
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    Pursuant to the proposed rule change, the educational communication 
requirement would not apply when the former customer expressly states 
that he or she is not interested in transferring assets to the member. 
If the former customer subsequently decides to transfer assets to the 
member without further individualized contact within the period of 
three months following the date that the representative begins 
employment or associates with the member, then the educational 
communication would be required to be provided with the account 
transfer approval documentation.\16\
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    \16\ See proposed FINRA Rule 2273.02 (Express Rejection by 
Former Customer).
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Format of Educational Communication

    To facilitate uniform communication under the proposed rule change 
and to assist members in providing the proposed communication to former 
customers of a representative, the proposed rule change would require a 
member to deliver the proposed educational communication prepared by 
FINRA to the former customer, individually, in paper or electronic 
form.\17\ The proposed rule change would require members to provide the 
FINRA-created communication and would not permit members to use an 
alternative format.\18\ As stated in the Notice, FINRA believes that 
the FINRA-created uniform educational communication will allow members 
to provide the required communication at a relatively low cost and 
without significant administrative burdens.\19\
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    \17\ See proposed FINRA Rule 2273(a) and Exhibit 3.
    \18\ See proposed FINRA Rule 2273(a).
    \19\ See Notice, supra note 3, 80 FR at 81592.
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III. Summary of Comment Letters and FINRA's Response

Overall Proposal

    Two commenters stated that the current proposal is an improvement 
from the previous version of the proposal.\20\ Eight additional 
commenters expressed support for a regulatory effort to provide 
investors with meaningful information upon which to base a decision to 
transfer assets but did not support all aspects of the current 
proposal.\21\ Two commenters opposed the current proposal and instead 
supported a return to the requirement in a previous version of the 
proposal to provide specific information about any financial incentives 
received by the representative and costs associated with the former 
customer transferring assets.\22\ Alternatively, another commenter 
suggested requiring the member to provide written answers to the 
questions included in the educational communication if the customer so 
requests.\23\ One commenter maintained that the proposal is not 
justified by its costs because there are no systemic issues with the 
current account transfer process, which also includes some 
disclosure.\24\
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    \20\ Lincoln and FSI.
    \21\ SIFMA, LPL, Wells Fargo, RJFS, RJFA, Commonwealth, and HD 
Vest.
    \22\ PIABA and GSU.
    \23\ GSU.
    \24\ HD Vest.
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    In its response to commenters, FINRA states that it believes that 
the proposal will promote investor protection by highlighting important 
conflict and cost considerations of transferring assets and encouraging 
customers to make further inquiries to reach an informed decision about 
whether to transfer assets to the recruiting firm. Furthermore, FINRA's 
response to commenters notes that, as explained in more detail in the 
Notice, FINRA considered several alternatives to the proposal to help 
ensure that it is narrowly tailored to achieve its purposes without 
imposing unnecessary costs and burdens on members.\25\ FINRA believes 
that the proposed rule is an effective and efficient alternative to the 
previous proposal. While educating former customers about important 
considerations to make an informed decision whether to transfer assets 
to the recruiting firm, FINRA believes the proposed rule eliminates or 
reduces the privacy and operational concerns raised regarding the 
previous proposal (e.g., by removing the requirement to disclose to 
former customers the magnitude of recruitment compensation paid to a 
transferring representative). FINRA notes that the dialogue prompted by 
the educational communication could include a discussion with the 
transferring representative about more specifics related to the 
incentives and costs associated with the transfer.
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    \25\ See Notice, supra note 3, 80 FR at 81593.
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    FINRA further states in its response to commenters that it believes 
that former customers would benefit from receiving a concise, plain-
English document that highlights the potential implications of 
transferring assets, such as conflict and cost considerations, several 
of which are not disclosed or otherwise brought to the attention of a 
customer as part of the account transfer approval documentation.

Requirement To Deliver the Educational Communication

    One commenter supported the proposal's delivery requirements as 
providing a ``clear and straightforward standard.'' \26\ The commenter 
further stated that with the ``straightforward standard, firms will be 
able to easily create and implement policies, procedures and systems to 
comply with the rule.'' \27\ Some commenters, on the other hand, stated 
that the triggers for delivering the educational

[[Page 17516]]

communication would be complex and difficult for members to implement 
as members would be dependent on reporting by representatives to 
members with respect to each individualized contact with a former 
customer.\28\ Some commenters commented that compliance with the 
proposed rule would require significant time and effort on the part of 
members and would result in significant costs.\29\
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    \26\ FSI.
    \27\ FSI.
    \28\ Commonwealth and HD Vest.
    \29\ Commonwealth and HD Vest.
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    In its response to commenters, FINRA states that it does not 
believe that the burdens associated with tracking whether there has 
been individualized contact with a former customer are unreasonable 
relative to the value in providing the educational communication to 
such customers. Moreover, FINRA's response to commenters notes that, as 
FINRA stated in the Notice, members already are obligated to supervise 
representatives' communications with existing or prospective customers 
and have flexibility to design their supervisory systems to track 
communications soliciting new business from former customers of 
representatives.\30\ As such, FINRA does not believe the proposed rule 
change imposes substantially new or burdensome obligations by requiring 
firms to establish policies and procedures reasonably designed to 
ensure that the educational communication is timely delivered to former 
customers.
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    \30\ See Notice, supra note 3, 80 FR at 81595.
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    One commenter stated that a member cannot supervise communications 
between representatives and former customers before such customers 
establish accounts at the member.\31\ In its response to commenters, 
FINRA states that it disagrees. If a representative is associated with 
or employed by a member, FINRA notes that the member is required to 
supervise the representative's conduct consistent with FINRA rules, 
including FINRA Rule 2210 (Communications with the Public). FINRA notes 
that the standards applicable to retail communications and 
correspondence under Rule 2210, as well as the requirements to 
supervise correspondence pursuant to FINRA Rule 3110 (Supervision), are 
not limited to communications with current customers. FINRA states that 
therefore, the fact that a former customer or any other individual has 
not yet established an account at the member does not obviate those 
supervision requirements.
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    \31\ HD Vest.
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 Individualized Contact

    Some commenters requested additional guidance as to what 
individualized contact with a former customer would trigger the 
requirement to deliver the educational communication.\32\ FINRA's 
response to commenters notes that, as stated in the Notice, it intends 
for a broad range of oral or written communications by a recruiting 
firm, directly or through a representative, to constitute 
individualized contact with a former customer to transfer assets and 
therefore trigger the delivery of the educational communication under 
the proposed rule.\33\ FINRA notes that the Notice provides several 
examples of such individualized contacts, including a written or oral 
communication informing the customer that the representative is now 
associated with the recruiting firm.\34\ In its response to commenters, 
FINRA states that it will consider giving additional guidance, as 
appropriate, where questions about specific types of individualized 
contact arise.
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    \32\ SIFMA, HD Vest, RJA, and RJFS.
    \33\ See Notice, supra note 3, 80 FR at 81591.
    \34\ See Notice, supra note 3, 80 FR at 81591.
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    The proposed rule change would require delivery of the educational 
communication, absent individualized contact, with account transfer 
approval documentation. One commenter supported requiring delivery of 
the educational communication to a former customer, where there is not 
individualized contact, before the transmittal of the account transfer 
approval documentation.\35\ FINRA's response to commenters notes that 
to lessen any associated operational and supervisory burdens of 
implementing the proposed rule, FINRA has not proposed requiring that 
the educational communication be provided to former customers before 
the account transfer approval documentation where there is not 
individualized contact.
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    \35\ GSU.
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    One commenter expressed the view that the different delivery 
requirements based on whether there was individualized contact would be 
unworkable as members could not reasonably determine that the receipt 
of account paperwork was the result of no contact between the 
registered person and the former customer.\36\
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    \36\ Commonwealth.
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    FINRA's response to commenters states that, as set forth in the 
Notice, FINRA believes that a representative reasonably should know 
whether an individual had an account assigned to him or her at the 
representative's prior firm and whether the representative has 
individually contacted the former customer regarding transferring 
assets to the recruiting firm.\37\ FINRA also states in its response to 
commenters that it believes that a reasonably designed supervisory 
system would require the representative to communicate with a member 
whether he or she had individualized contact with a former customer. As 
such, FINRA does not believe it is unworkable to distinguish account 
transfers that resulted absent individualized contact.
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    \37\ See Notice, supra note 3, 80 FR at 81594.
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    Some commenters requested clarification regarding whether the 
requirements of the proposed rule would be triggered by ``unanticipated 
communications'' between a representative and a former customer.\38\ In 
its response to commenters, FINRA explains that the proposed rule would 
apply where a member, directly or through a representative, 
individually contacts a former customer of that representative to 
transfer assets or where a former customer transfers assets to an 
account assigned to the representative at the member absent 
individualized contact. As such, FINRA notes that whether contact that 
occurs with a former customer is planned or serendipitous is not 
dispositive; rather, it is the substance of the communication that 
determines if the delivery requirement is triggered. Thus, FINRA 
explains that unanticipated contact with a former customer (e.g., at a 
sporting or social event) without a communication from the 
representative to the former customer that would constitute 
individualized contact, as described above, about transferring assets 
would not trigger the requirements of the proposed rule. In its 
response to commenters FINRA notes that, if, for example, the 
representative took the opportunity of the situation to inform the 
former customer of his or her move to a new firm and the merits of 
transferring assets to that new firm, the delivery requirement would be 
triggered.
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    \38\ Lincoln, LPL, RJA, and RJFS.
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Timing and Delivery of Educational Communication
    Several commenters expressed concern with the means and timing of 
the delivery requirement. Some commenters contended that the 
requirement to deliver the educational communication within three 
business days after oral contact by a representative with a former 
customer would present operational and supervisory challenges, such as 
training

[[Page 17517]]

representatives on the scope and practical implications of the 
requirement, relying on representatives to timely report contacts to 
the member, and preparing the mailing to former customers within the 
required period of time.\39\ One commenter suggested eliminating the 
requirement to deliver the educational communication within three 
business days after oral contact and instead require written delivery 
in all circumstances.\40\ Along with that commenter, some commenters 
suggested that the requirement to deliver the educational communication 
be integrated into an existing process, such as including the 
communication with the account transfer approval documentation, so as 
to make implementation of the requirement more cost effective and 
efficient for members.\41\ Alternatively, one commenter suggested 
lengthening the period to deliver the educational communication to 10 
business days.\42\
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    \39\ SIFMA, Committee of Annuity Insurers, Lincoln, RJA, RJFS, 
Commonwealth, and HD Vest.
    \40\ Wells Fargo.
    \41\ Wells Fargo, SIFMA, Lincoln, Committee of Annuity Insurers, 
RJA, RJFS, Commonwealth, and HD Vest.
    \42\ HD Vest.
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    One commenter requested additional analysis and justification for 
FINRA's belief that delivering the communication at or prior to account 
opening would be too late because customers typically have already made 
the decision to transfer assets by that point in the process.\43\ 
Another commenter stated that requiring the educational communication 
to accompany the first written communication would mean that any 
efforts taken by a member to review written communications that have 
already occurred between a representative and a former customer would 
be too late to prevent a rule violation.\44\
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    \43\ SIFMA.
    \44\ Commonwealth.
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    FINRA's response to commenters notes that with respect to delivery 
after oral contact, as stated in the Notice, FINRA believes that the 
three-business-day period gives a representative sufficient time to 
inform the recruiting firm of the former customers who have been 
contacted and, in turn, for the recruiting firm to send the educational 
communication to those former customers.\45\ Furthermore, as stated in 
its response to commenters, FINRA understands that members frequently 
send account opening documentation within that time frame to customers 
that have indicated an interest in opening an account. FINRA also notes 
that it sought data and evidence around the associated costs of the 
proposed rule and that commenters did not provide specific data or 
analysis to support their contention that the delivery requirements as 
proposed would present considerable additional costs for recruiting 
firms. Accordingly, FINRA does not propose to change the requirement in 
the proposed rule.
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    \45\ See Notice, supra note 3, 80 FR at 81595-81596.
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    As explained in its response to commenters and in more detail in 
the Notice, FINRA believes that to be effective, the proposed 
educational communication must be accessible to the former customer at 
or shortly after the time the first individualized contact is made by 
the recruiting firm or the representative.\46\ In its response to 
commenters, FINRA notes that the delivery requirement will allow the 
customer the time needed to have discussions with the registered 
representative and the customer's current firm about the implications 
of transferring assets in close proximity to receipt of any information 
the representative may have provided to encourage a transfer and will 
facilitate an informed and reasoned decision. FINRA further notes that 
some commenters to its Regulatory Notice 15-19,\47\ where FINRA first 
proposed the delivery requirements, noted the benefits of timely 
delivery. FINRA points out that two commenters to Regulatory Notice 15-
19 supported requiring delivery of the educational communication prior 
to the time that a former customer decides to transfer assets to the 
recruiting firm to ensure that the former customer has sufficient time 
to consider and respond to the information in the communication.\48\ 
FINRA also notes that another broker-dealer commenter that favored 
contemporaneous delivery of the educational communication at the time 
of first individualized contact stated that permitting three business 
days following an oral communication was too late as many customers 
will make a determination to transfer assets prior to receiving the 
communication.\49\
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    \46\ See Notice, supra note 3, 80 FR at 81595.
    \47\ See FINRA Requests Comment on a Proposed Rule to Require 
Delivery of an Educational Communication to Customers of a 
Transferring Representative, Regulatory Notice 15-19, at 4 (May 
2015) (``Notice 15-19'').
    \48\ See Letter from Jeffrey T. Brown, Senior Vice President and 
Head of Legislative and Regulatory Affairs, Charles Schwab & Co., 
Inc., to Marcia E. Asquith, Senior Vice President and Corporate 
Secretary of FINRA, dated July 13, 2015; and letter from Joseph C. 
Peiffer, President, Public Investors Arbitration Bar Association, to 
Marcia E. Asquith, Senior Vice President and Corporate Secretary of 
FINRA, dated July 13, 2015.
    \49\ See Letter from Jesse Hill, Principal--Government and 
Regulatory Relations, Edward Jones, to Marcia E. Asquith, Senior 
Vice President and Corporate Secretary of FINRA, dated July 14, 
2015.
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    In its response to commenters, FINRA states that it agrees with the 
commenters that providing the communication at the time of account 
opening would be less effective than the proposed approach as customers 
have already made the decision to transfer assets at the time the 
customer has initiated the account opening process. Similarly, FINRA 
states that it believes a requirement to permit delivery of the 
educational communication at any time prior to account opening would 
allow members to wait until the customer agrees to transfer assets to 
the member or until shortly before the account is opened before 
delivering the educational communication.
    Finally, with respect to one comment that post-use review of 
communications cannot prevent a violation of the requirement that the 
educational communication accompany written first individualized 
contact,\50\ FINRA notes in its response to commenters that its rules 
provide members' some flexibility with respect to review of 
representatives' communications with customers and require review of 
only some communications prior to first use or distribution.\51\ 
Consistent with those rules, FINRA states that a member would not 
necessarily need to implement prior use approval of every written 
communication to a former customer to have policies and procedures 
reasonably designed to achieve compliance with the proposed rule 
change.
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    \50\ Commonwealth.
    \51\ FINRA states, for example, that correspondence with 
customers is subject to the supervision and review requirements of 
FINRA Rules 3110(b) and 3110.06 through .09. While review of all 
institutional communications is not required prior to first use or 
distribution, FINRA states that FINRA Rule 2210(b)(1)(A) requires 
that an appropriately qualified registered principal of the member 
must approve each retail communication before the earlier of its use 
or filing with FINRA's Advertising Regulation Department.
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Duration of Delivery Requirement

    Under the proposed rule change, the delivery of the educational 
communication would apply for three months following the date the 
representative begins employment or associates with the member. One 
commenter supported shortening the applicable time period from six 
months as proposed in Notice 15-19 \52\ to three

[[Page 17518]]

months as proposed in the Notice.\53\ On the other hand, two commenters 
supported extending the period to one year.\54\
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    \52\ See Notice 15-19, supra note 47, at 4.
    \53\ SIFMA.
    \54\ PIABA and GSU.
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    In its response to commenters, FINRA states that it believes the 
three-month period strikes an appropriate balance between achieving the 
regulatory objective of an informed decision by former customers most 
likely to consider transferring assets as the result of their 
representative's move to a new firm, while lessening the economic 
impacts on members.

Efforts by Current Firm To Retain Customers

    One commenter favored requiring a customer's current firm to 
deliver the educational communication to the customer and including 
questions in the communication that a customer may wish to consider if 
the current firm is soliciting a customer to keep his or her account 
with the firm.\55\ Another commenter also supported including specific 
disclosure about the incentives that employees of the current firm may 
receive for retaining the customer.\56\
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    \55\ Lincoln.
    \56\ PIABA.
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    FINRA's response to commenters states that, as noted in the Notice, 
FINRA is focused on providing customers impactful information to 
consider when deciding whether to transfer assets to a representative's 
new firm, where cost and portability issues are most likely to arise 
and where some potential conflicts (e.g., financial incentives to 
attract new assets) are more pronounced.\57\ In its response to 
commenters, FINRA states that while the proposed rule change would not 
require the current firm to provide the educational communication to a 
customer, the proposed educational communication does note that ``some 
firms pay financial incentives to retain brokers or customers.'' FINRA 
further states that it believes that the communication will prompt 
customers to consider the implications of both staying and moving when 
urged to do so by representatives of either firm. Furthermore, FINRA 
notes that requiring the current firm to also provide the educational 
communication to a customer whose representative has transferred to a 
new firm would result in the customer receiving multiple copies of the 
same communication.
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    \57\ See Notice, supra note 3, 80 FR at 81598.
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Contractual and Legal Considerations

    Three commenters suggested including a statement in the educational 
communication that the communication is not intended as a solicitation 
or to encourage or discourage the transfer of customer assets.\58\ Two 
commenters asked FINRA to amend the proposed rule to include a 
provision stating that compliance with the rule is not intended to 
interfere with members' obligations under Regulation S-P, the Protocol 
or other contractual non-solicitation obligations.\59\
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    \58\ SIFMA, HD Vest, and LPL.
    \59\ RJA and RJFS.
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    In its response to commenters, and as noted in the Notice in 
response to earlier comments of the same nature, FINRA states that it 
does not intend the proposed rule to impact any contractual agreement 
between a representative and his or her former firm or new firm and 
does not require members to disclose information in a manner 
inconsistent with Regulation S-P.\60\ FINRA notes that the proposed 
rule change assumes that recruiting firms and representatives will act 
in accordance with the contractual obligations established in 
employment contracts, state law, and, if applicable, the Protocol. 
Furthermore, in its response to commenters, FINRA states that it does 
not intend for the provision of the educational communication to have 
any relevance to a determination of whether a representative 
impermissibly solicited a former customer in breach of a contractual 
obligation. FINRA does not believe it necessary or appropriate to 
include any statement regarding solicitation in the educational 
communication, which by itself and its own terms cannot reasonably be 
considered to encourage or discourage the transfer of assets.
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    \60\ See Notice, supra note 3, 80 FR at 81599.
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    One commenter stated that an exception from Regulation S-P was 
needed to permit transferring representatives to take limited customer 
information with them to their new firms in order to comply with the 
requirements of the proposed rule.\61\ In its response to commenters, 
FINRA disagrees. FINRA states that the proposed rule does not require 
contact with any former customers, but rather, only requires delivering 
the educational communication once a transferring representative or the 
recruiting firm makes individualized contact with a former customer 
about transferring assets to an account assigned to the representative 
at the member. FINRA states that it believes that in most instances, a 
former customer will not be contacted in the first instance unless the 
representative or recruiting firm already has the customer's contact 
information. In those rare circumstances where individualized contact 
that triggers the requirements of the rule happens by chance or without 
contact information, FINRA believes the representative or recruiting 
firm can ask the customer for the contact information needed to deliver 
the educational communication.
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    \61\ HD Vest.
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Scope of Proposal

Customers
    Two commenters supported expanding the requirement to apply to all 
customers of a representative, not just a representative's former 
customers.\62\ One commenter recommended that the proposed rule 
incorporate the definition of institutional account in FINRA Rule 
4512(c) (Customer Account Information) without excluding accounts held 
by any natural person.\63\
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    \62\ PIABA and GSU.
    \63\ SIFMA.
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    In its response to commenters, FINRA declines to revise the 
definition of ``former customer'' or to extend the requirement to apply 
to other customers of a representative. Furthermore, FINRA's response 
to commenters notes that, as stated in the Notice, FINRA believes that 
former customers that a member or representative individually contacts 
to transfer assets to a new firm are most impacted in recruitment 
situations because they have already developed a relationship with the 
representative and because their assets may be both the basis for the 
representative's recruitment compensation and subject to potential 
costs and changes if the customer decides to move those assets to the 
recruiting firm.\64\ In its response to commenters, FINRA states that 
it believes that it is appropriate to include natural persons who would 
be considered institutional accounts under Rule 4512(c), as these 
individuals may not be aware of the implications of transferring 
assets.
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    \64\ See Notice, supra note 3, 80 FR at 81600.
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    Two commenters supported requiring customer affirmation of the 
receipt of the educational communication.\65\ FINRA's response to 
commenters explains that, as noted in more detail in the Notice, while 
some firms may elect to include a customer affirmation requirement as 
part of their supervisory controls in implementing the proposed rule 
change, FINRA believes the requirements of the rule will ensure that

[[Page 17519]]

former customers receive and have an opportunity to review the 
information in the proposed educational communication before they 
decide to transfer assets to a recruiting firm.\66\ In addition, FINRA 
states that it does not want to impose any additional obligations that 
may impede the timely transfer of customer assets between members.
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    \65\ PIABA and GSU.
    \66\ See Notice, supra note 3, 80 FR at 81597.
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Members and Registered Representatives
    One commenter requested clarification regarding whether the 
proposed rule would apply to representatives who are employed by or 
associated with a member in a non-financial advisor role (e.g., 
operations or non-producing branch/complex managers), but who may have 
customer accounts assigned to them that are incidental to their primary 
job function.\67\ FINRA states in its response to commenters that to 
the extent a representative has accounts assigned to him or her at the 
new firm, FINRA sees no reason to distinguish those accounts based on 
the representative's primary function, as the implications for the 
former customers are the same. Accordingly, FINRA believes that because 
an account assigned to a representative may be incidental to a 
representative's primary job function should not obviate the 
requirements of the proposed rule.
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    \67\ SIFMA.
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    Two commenters requested clarification on whether the proposed rule 
would apply when a representative transfers between broker-dealer 
subsidiaries of the same holding company.\68\ In its response to 
commenters, FINRA states that it believes that the facts and 
circumstances of such representative transfers may vary. FINRA will 
consider giving additional guidance, as appropriate, where specific 
questions arise regarding representative transfers between broker-
dealer subsidiaries of the same holding company.
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    \68\ RJA and RJFS.
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    In the Notice, FINRA interpreted the proposed rule change as not 
applying to circumstances where a customer's account is proposed to be 
transferred to a new member via bulk transfer or due to a change of 
broker-dealer of record.\69\ Four commenters supported the 
clarification provided in the Notice in these contexts.\70\ One 
commenter stated that the interpretation that the proposed rule would 
not apply should be extended to include all changes in networking 
arrangements between a financial institution and a broker-dealer, and 
not just those for which bulk transfers are used.\71\
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    \69\ See Notice, supra note 3, 80 FR at 81596.
    \70\ SIFMA, FSI, Committee of Annuity Insurers, and LPL.
    \71\ LPL.
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    In its response to commenters, FINRA states that it believes that 
the considerations set forth in the educational communication do not 
have the same application in the context of a bulk transfer as they do 
when a customer has a viable choice between staying at his or her 
current firm with the same level of products and services or 
transferring assets to the recruiting firm, with the attendant impacts. 
Because the facts and circumstances of changes in networking 
arrangements between a financial institution and a broker-dealer 
outside the bulk transfer context may vary, FINRA will consider giving 
additional guidance, as appropriate, where specific questions arise for 
changes in networking arrangements outside the bulk transfer context.
    In the Notice, FINRA stated that the proposed rule change would 
apply to a registered person dually registered as an investment adviser 
and broker-dealer at the former firm who associates with a member firm 
in both an investment advisory and broker-dealer capacity.\72\ One 
commenter supported the clarification provided in the Notice regarding 
the treatment of dual hatted persons.\73\ Another commenter noted that 
there may be instances where dually registered representatives have 
former clients with only investment advisory accounts at the former 
firm and requested clarification on whether the proposed rule would 
apply to such former customers.\74\
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    \72\ See Notice, supra note 3, 80 FR at 81601.
    \73\ SIFMA.
    \74\ LPL.
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    In its response to commenters, FINRA notes that it proposed to 
define ``former customer'' to include any customer that had a 
securities account assigned to a representative at the representative's 
previous firm, excluding a customer account that meets the definition 
of an institutional account pursuant to Rule 4512(c) other than 
accounts held by any natural person. FINRA would interpret this 
definition to include an individual who had only an investment advisory 
account at the representative's old firm. FINRA notes that the proposed 
rule would not apply if the registered person transferred to a non-
member firm or associated with a member firm only as an investment 
adviser representative.

Terminology

    Two commenters supported replacing the term ``broker'' in the 
educational communication with the term ``registered representative.'' 
\75\
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    \75\ RJFS, RJFA.
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    In its response to commenters, FINRA declines to make the requested 
change as it believes ``broker'' is a commonly understood generic term 
for a registered representative. It is used in the proposed educational 
communication for readability and brevity purposes, which FINRA 
believes is important to encourage customers to read the document.

Implementation Date

    One commenter requested that the implementation date of the 
proposed rule be at least 180 days from the date that the proposed rule 
is finalized so as to provide members with sufficient time to design, 
adopt, and implement appropriate policies and procedures to achieve 
compliance with the rule.\76\
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    \76\ SIFMA.
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    In its response to commenters, FINRA states that it will consider 
the need to develop compliance systems and make operational changes in 
establishing an effective date for the proposed rule.

IV. Discussion and Commission Findings

    After carefully considering the proposal, the comments submitted, 
and FINRA's response to the comments, the Commission finds that the 
proposed rule change is consistent with the requirements of the 
Exchange Act and rules and regulations thereunder applicable to a 
national securities association.\77\ In particular, the Commission 
finds that the proposed rule change is consistent with Exchange Act 
section 15A(b)(6),\78\ which requires, among other things, that the 
rules of a national securities association be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest.
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    \77\ In approving the proposed rule change, the Commission has 
considered the impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \78\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that the proposed rule change would 
increase the information available to investors

[[Page 17520]]

regarding the potential implications of transferring assets. The 
Commission further believes that the proposed educational communication 
may encourage former customers to make inquiries of their 
representatives, which could increase communication between customers 
and representatives about the potential implications of transferring 
assets. The Commission believes that the increase in information and 
communication about the potential implications of transferring assets 
will benefit customers when deciding whether to transfer assets.
    The Commission does not believe that the proposed rule change will 
result in a burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Exchange Act. The Commission 
believes FINRA has carefully crafted the proposed rule change to 
achieve its intended and necessary regulatory purpose while minimizing 
the burden on firms. Although the proposed rule change will impose new 
requirements upon FINRA members, it will apply equally to all FINRA 
members when hiring or otherwise associating with a registered 
representative.
    The Commission has considered the commenters' views on the proposed 
rule change and believes that FINRA responded appropriately to the 
concerns raised.
    For the reasons stated above, the Commission finds that the rule 
change is consistent with the Act and the rules and regulations 
thereunder.

V. Conclusion

    IT IS THEREFORE ORDERED, pursuant to Exchange Act section 19(b)(2) 
\79\ that the proposed rule change (SR-FINRA-2015-057) be, and hereby 
is, approved.
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    \79\ 15 U.S.C. 78s(b)(2).
    \80\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\80\
Brent J. Fields,
Secretary.
[FR Doc. 2016-06995 Filed 3-28-16; 8:45 am]
 BILLING CODE 8011-01-P