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Client Alert: FINRA Rule 2273 on Educational Communications

May 23, 2016

FINRA Rule 2273 requires a member firm that hires or associates with a registered representative to deliver a FINRA-prepared, plain-English “educational communication” to the representative’s former customers along with any individualized contact with the customer. The SEC approved the proposed FINRA rule on March 26, 2016, and it will be implemented on September 23, 2016. 

What triggers the delivery requirement?

The educational communication must be delivered to the customer if the new firm or the representative contacts the customer about transferring assets or if the customer independently authorizes a transfer of assets to an account connected with the representative within three months of the representative’s transition to the new firm. 

The manner of delivery depends on the type of individual contact. If the contact is in writing, the educational communication must be delivered contemporaneously. If the contact is electronic, a hyperlink to the electronic communication is sufficient. If the contact is oral, the representative must tell the client during the conversation that the educational communication — which includes important considerations in deciding whether to transfer assets — will be provided no later than three days after the contact. Then, the educational communication must be sent (not received by the customer) within three business days or be included with any other documents related to transferring assets sent to the customer.

Where there is no individualized contact and the customer initiates the asset transfer, the educational communication must be delivered with the account transfer approval documentation if the transfer occurs less than three months from the date the representative begins employment or affiliation with the recruiting firm.

What is the educational communication?

FINRA intends this communication to highlight the potential consequences of transferring assets to the representative’s recruiting firm, including:

  1. Potential conflicts of interest that may arise if the representative receives financial incentives for transferring assets to, or opening accounts with, the recruiting firm;
  2. That some assets may not be directly transferable and could result in the customer incurring charges or costs to liquidate and move the assets or account maintenance fees associated with leaving the account at the customer’s current firm; 
  3. Potential costs related to transferring assets to the recruiting firm (i.e. differences in price structures, fees imposed by the current vs. recruiting firm, etc.); 
  4. That there may be differences in products between the customer’s current firm versus the recruiting firm. 

Some firms offer financial incentives to retain the representative or customers. The communication describes the customer’s options, and it allows them to weigh the proper costs and benefits when making the decision about whether they will stay with the current firm or transfer their assets to the representative’s new firm.

What are individualized contacts?

Individualized contact triggers the delivery requirement of the education communication. As discussed above, the nature of the contact is not relevant. Instead, the contact requires the communication if it does any of the following:

  1. Informs the customer of the representative’s new affiliation with the recruiting firm (including communications that are permitted by the Protocol for Broker Recruiting);
  2. Suggests that the customer consider transferring assets to the representative at the recruiting firm;
  3. Informs the customer that the recruiting firm may offer better or different products and services than his or her current firm; or
  4. Discusses the fees or pricing structure of the recruiting firm. 

Contrary to the general implication of the word “individualized,” any contact or communication (written or oral) directed toward a group of former customers triggers the delivery requirement. This includes (but is not limited to) mass mailings of information, copies of information sent via email, automated phone calls, voice mails or personal visits. The contact does not need to be personalized to the specific customer. FINRA is clear that its intent is to interpret the provision broadly so it applies to any manner of conveying information to the former customer.

What does this mean for your business?

FINRA Rule 2273 will have a clear impact on the current practices of investment firms both when hiring new recruits and losing advisers to competitors. Firms should revise their policies and procedures to ensure compliance with the requirements of the rule and review the current supervisory systems and execute any necessary changes to ensure timely delivery of educational materials. 

The order adopting the rule makes clear that the rule has no impact on the enforceability of the non-solicitation provision or other post-employment obligations. However, in spite of language in the SEC order that the rule is not intended to have “any relevance to a determination of whether a representative impermissibly solicited a former customer,” the order does not prohibit use of the information to draw inferences of potential breaches of restrictive covenants. Consequently, firms would be wise to remain conscious to the potential of an increase in restrictive covenant litigation arising from the potential evidentiary concerns raised as a result of this requirement to circulate the educational communication after a contact with a former customer.

For more information on protecting your firm’s recruiting practices, insulating from losses as a result of a departing adviser or broker, and operating within the exemptions of Rule 2273, contact Greensfelder’sSecurities & Financial Services Group or your regular Greensfelder contact.