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Polsinelli - Financial and Fiduciary Litigation Polsinelli - Financial and Fiduciary Litigation


May 2016


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







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Paul R. Wood


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Thomas H. Wagner


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

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

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

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

Differences in the Approved Version

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

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

Polsinelli is poised to help your business comply with the new recruitment bonus disclosure rule. Contact the authors or your professionals at Polsinelli for help navigating the new rule.

For More Information

For questions regarding this information, please contact one of the authors, a member of Polsinelli’s Financial and Fiduciary Litigation practice, or your Polsinelli attorney.

About Financial and Fiduciary Litigation

The Financial and Fiduciary Litigation practice delivers common sense advocacy in the most highly-regulated and complex areas of the law. Whether in Chancery Court in Delaware, federal or state courts throughout the United States, or before regulatory agencies, exceedingly knowledgeable trial lawyers work closely with the firm's corporate finance transactional attorneys to provide seamless representation of our clients. [More...]











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