The Financial Industry Regulatory Authority (“FINRA”) announced in Regulatory Notice 16-18 that the Securities and Exchange Commission approved the adoption of FINRA Rule 2273 (Educational Communication Related to Recruitment Practices and Account Transfers). The rule establishes an obligation to deliver an educational communication in connection with firm recruitment practices and account transfers. The rule becomes effective November 11, 2016.
Representatives who leave their firms often contact former customers and emphasize the benefits the former customers would experience by transferring their assets to the firm that recruited the registered representative (recruiting firm) and maintaining their relationship with the representative. In this situation, the former customer’s confidence in and prior experience with the representative may be one of the customer’s most important considerations in determining whether to transfer assets to the recruiting firm. However, 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 the customer may incur.
Therefore, to provide former customers with a more complete picture of the potential implications of a decision to transfer assets, Rule 2273 requires delivery of a FINRA created educational communication by the recruiting firm that highlights key considerations for former customers in transferring assets to the recruiting firm, and the direct and indirect impacts of such a transfer on those assets.
To facilitate uniform communication under the rule and to minimize the burden on firms in providing the communication to former customers of a representative, the rule requires firms to provide the FINRA-created communication, in paper or electronic form, and does not permit firms to use an alternative format. 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 rule requires a firm to deliver the educational communication at the time of first individualized contact with a former customer by the firm, directly or through the representative, regarding the former customer transferring assets to the firm.
If the former customer seeks to transfer assets to an account assigned, or to be assigned, to the representative at the firm, but no individualized contact with the former customer by the representative or firm occurs before the former customer seeks to transfer assets, the rule mandates that the firm deliver the educational communication to the former customer with the account transfer approval documentation. The educational communication requirement in the rule applies for a period of three months following the date that the representative begins employment or associates with the recruiting firm.
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 firm. If the former customer subsequently decides to transfer assets to the firm without further individualized contact within the period of three months following the date that the representative begins employment or associates with the firm, then the educational communication is required to be provided with the account transfer approval documentation.