
[Federal Register Volume 80, Number 250 (Wednesday, December 30, 2015)]
[Notices]
[Pages 81590-81601]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-32816]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76757; File No. SR-FINRA-2015-057]


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

December 23, 2015.
    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 December 16, 2015, 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 substantially 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 2273, which would establish 
an obligation for a member to deliver an educational communication in 
connection with member recruitment practices and account transfers. The 
text of the proposed rule change is available on FINRA's Web site at 
http://

[[Page 81591]]

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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Background
    Representatives who leave their member firm 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, 
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 directs 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.
    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.
    The details of proposed FINRA Rule 2273 (Educational Communication 
Related to Recruitment Practices and Account Transfers) are set forth 
below.
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.\3\
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    \3\ 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.\4\
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    \4\ 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 proposed 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, 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
    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. 
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''); \5\ (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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    \5\ 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, 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. 
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.

[[Page 81592]]

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 first individualized contact 
with a former customer by the member, directly or through the 
representative, regarding the former customer transferring assets to 
the member.\6\ 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.\7\
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    \6\ See proposed FINRA Rule 2273(b)(1).
    \7\ 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.\8\
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    \8\ 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.\9\ 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.\10\
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    \9\ See proposed FINRA Rule 2273(b)(2).
    \10\ 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.\11\
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    \11\ 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.\12\ The proposed rule change would require members to provide the 
FINRA-created communication and would not permit members to use an 
alternative format.\13\ 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.
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    \12\ See proposed FINRA Rule 2273(a) and Exhibit 3.
    \13\ See proposed FINRA Rule 2273(a).
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    If the Commission approves the proposed rule change, 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,\14\ 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 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. This belief is supported by 
FINRA's test of the educational communication with a diverse group of 
retail investors. The investors tested indicated that the educational 
communication effectively conveyed important and useful information. 
The investors also indicated that the communication identified issues 
to consider that they had previously been unaware of and that would be 
meaningful in making a decision whether to transfer assets to the 
representative's new firm.
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    \14\ 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. All members would be subject to 
the proposed rule change, so they would be affected in the same manner, 
and FINRA has narrowly tailored the rule requirements to minimize the 
impacts on firms.
    FINRA believes that the proposed rule change would protect 
investors by highlighting the potential implications of transferring 
assets to the recruiting firm. The proposed educational communication 
is intended to prompt a former customer 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.
    FINRA recognizes that a member that hires or associates with a 
registered person would incur costs to comply with the proposed rule 
change on an initial and ongoing basis. Members would need to establish 
and maintain written policies and procedures reasonably designed to 
ensure compliance with the proposed rule change, including monitoring 
communications by the transferring representative and other associated 
persons of the recruiting firm with former retail customers of the 
representative. The compliance costs would likely vary across members 
based on a number of factors such as the size of a firm, the extent to 
which a member hires registered representatives from other firms, and 
the effectiveness and application of existing procedures to the types 
of communications that must be monitored under the proposed rule 
change.
    FINRA does not believe that the proposed rule change will impose 
undue operational costs on members to comply with the educational 
communication. While FINRA recognizes that there will be some small 
operational costs to members in complying with the proposed

[[Page 81593]]

educational communication requirement, FINRA has lessened the cost of 
compliance by developing a standardized educational communication for 
use by members that does not require members to make any threshold 
determinations or provide any additional or customized information to 
complete the communication. Furthermore, the proposed rule change would 
permit a member to deliver the educational communication in paper or 
electronic form thereby giving the member alternative methods of 
complying with the requirement.
    In developing the proposed rule change, FINRA considered several 
alternatives to the proposed rule change, 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.\15\ The proposed rule change addresses many of the 
concerns noted by commenters in response to the Notice 13-02 Proposal 
and Rule 2243 Proposal.
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    \15\ See Item II.C., which references Regulatory Notice 13-02 
(Jan. 2013) (``Notice 13-02 Proposal''), Exchange Act Release No. 
71786 (Mar. 24, 2014), 79 FR 17592 (Mar. 28, 2014) (Notice of Filing 
of File No. SR-FINRA-2014-010) (``Rule 2243 Proposal''), and 
Regulatory Notice 15-19 (May 2015) (``Notice 15-19 Proposal'').
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    First, the Notice 13-02 Proposal 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 
\16\ 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 revised approach in the 
Rule 2243 Proposal would have required 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. In the proposed rule 
change FINRA has removed the requirement to disclose to former 
customers the magnitude of recruitment compensation paid to a 
transferring representative due to the privacy and operational concerns 
expressed by commenters to the Rule 2243 Proposal. Furthermore, 
removing the requirement to disclose ranges of compensation also 
obviates members' need to calculate recruitment compensation to be paid 
to a transferring representative so as to determine whether the 
threshold of $100,000 or more in compensation has been reached.
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    \16\ In the Notice 13-02 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.
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    Second, the Rule 2243 Proposal would have required 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 could assess the impact of these 
arrangements on a member's and representative's obligations to 
customers and detect potential sales practices abuses. Consistent with 
the removal of the requirement to disclose ranges of recruitment 
compensation paid to a transferring representative, the proposed rule 
change does not include a reporting obligation. However, FINRA will 
include potential customer harm resulting from recruitment compensation 
as part of its broader conflicts management review.
    Third, the disclosure requirements in the Notice 13-02 Proposal and 
Rule 2243 Proposal would have applied for a period of one year 
following the date the representative began employment or associated 
with the member. The Notice 15-19 Proposal proposed that the delivery 
of the educational communication would apply for six months following 
the date the representative began employment or associated with the 
member. In recognition of the typical time frame for communicating with 
former customers and to lessen any associated operational and 
supervisory burdens, the proposed rule change provides that the 
delivery of the educational communication shall apply for three months 
following the date the representative begins employment or associates 
with the member.
    Fourth, in response to concerns from commenters to the Rule 2243 
Proposal about the proposal's competitive implications, operational 
aspects and the effectiveness of the proposed compensation disclosures, 
FINRA has instead proposed requiring delivery of an educational 
communication that highlights key considerations in transferring assets 
to the recruiting firm, and the direct and indirect impacts of such a 
transfer on those assets. Moreover, to ensure that former customers 
receive uniform information and to ease implementation of the proposed 
rule change, FINRA has created an educational communication for members 
to use in satisfying the proposed requirements. FINRA believes this 
approach is more effective than a general disclosure requirement of the 
fact of additional compensation paid to the representative because the 
educational communication allows for more context and explanation and 
is more likely to prompt a discussion with the transferring 
representative and the customer's current firm.
    For these reasons, FINRA believes that the proposed rule change 
would not burden competition, but, instead, would strengthen FINRA's 
regulatory structure and provide additional protection to investors.

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

Rule 2243 Proposal
    In March 2014, FINRA filed a proposal to adopt Rule 2243 to 
establish disclosure and reporting obligations related to member 
recruitment practices.\17\ The Rule 2243 Proposal imposed two 
obligations on members: (1) A disclosure obligation to former customers 
who the recruiting firm attempts to induce to follow a transferring 
representative; and (2) a reporting obligation to FINRA where a 
transferring representative receives a significant increase in 
compensation from the recruiting firm. Under the Rule 2243 Proposal, 
the disclosure obligation would have required a recruiting firm to 
disclose to a former customer ranges of recruitment compensation that 
the representative had received or would receive in connection with 
transferring to the recruiting firm and the basis for that compensation 
(e.g., asset-based or production-based). The requirement would have 
applied separately to $100,000 or more of aggregated ``upfront 
payments'' or aggregated ``potential future payments.'' In addition, 
the Rule 2243 Proposal would have required disclosure if a former 
customer would

[[Page 81594]]

incur costs to transfer assets to the recruiting firm (e.g., account 
termination, transfer or account opening fees) that would not be 
reimbursed by the recruiting firm and if any of the former customer's 
assets were not transferrable to the recruiting firm (and associated 
costs, including taxes, to liquidate and transfer those assets or leave 
them at the customer's current firm).
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    \17\ See Rule 2243 Proposal. FINRA considered and responded to 
the comments to the Notice 13-02 Proposal in the proposed rule 
change for the Rule 2243 Proposal.
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    FINRA developed a one-page disclosure template for the Rule 2243 
Proposal, but allowed members to use an alternative form if it 
contained substantially similar content. The Rule 2243 Proposal would 
have required delivery of the disclosures at the time of first 
individualized contact with a former customer by the transferring 
representative or recruiting firm. The Rule 2243 Proposal would have 
required disclosure for one year following the date the representative 
began employment or associated with the recruiting firm.
    With respect to the reporting obligation, the Rule 2243 Proposal 
would have required a member to report to FINRA if the member 
reasonably expected the total compensation paid to the transferring 
representative during the representative's first year of association 
with the member to result in an increase over the representative's 
prior year compensation by the greater of 25% or $100,000. FINRA 
intended to use the information received as a data point in its risk-
based examination program.
    The SEC received 184 comments on the Rule 2243 Proposal, including 
33 unique comments. Commenters to the Rule 2243 Proposal conveyed 
concerns about the proposal's competitive implications and operational 
aspects, as well as the effectiveness of the proposed compensation 
disclosures. On June 20, 2014, FINRA withdrew SR-FINRA-2014-010 to 
further consider the comments to the Rule 2243 Proposal.\18\
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    \18\ See Exchange Act Rel. No. 72459 (June 20, 2014), 79 FR 
36855 (June 30, 2014) (Notice of Withdrawal of File No. SR-FINRA-
2014-010).
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Notice 15-19 Proposal
    A revised proposal was published for public comment in Regulatory 
Notice 15-19. FINRA received 27 comment letters in response to the 
Notice 15-19 Proposal. A copy of Regulatory Notice 15-19 is attached as 
Exhibit 2a. Copies of the comment letters received in response to the 
Notice 15-19 Proposal are attached as Exhibit 2c.\19\ The comments and 
FINRA's responses are set forth in detail below.
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    \19\ See Exhibit 2b for a list of abbreviations assigned to 
commenters.
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General Support and Opposition to the Proposal
    Eight commenters stated that the Notice 15-19 Proposal is an 
improvement from the Rule 2243 Proposal.\20\ Five additional commenters 
expressed support for a regulatory effort to provide investors with 
meaningful information upon which to base a decision but did not 
support all aspects of the Notice 15-19 Proposal.\21\ Three commenters 
opposed the Notice 15-19 Proposal and instead supported a return to the 
Rule 2243 Proposal's requirement to provide specific information about 
any financial incentives received by the representative and costs 
associated with the former customer transferring assets.\22\ One 
commenter supported requiring disclosure to former customers of 
enhanced compensation if the representative has been or will be paid 
for bringing client assets to the recruiting firm or generating new 
commissions or fee income.\23\
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    \20\ See FSR, FSI, CAI, Lincoln, Ameriprise, NAIFA, Janney, and 
Burns.
    \21\ See SIFMA, Cambridge, RJA, RJFS, and Edward Jones.
    \22\ See Schwab, NASAA, and Hanson McClain.
    \23\ See PIABA.
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    FINRA believes that the proposed rule change (reflected, in part, 
in the Notice 15-19 Proposal) is an effective and efficient alternative 
to the previous proposal. The proposed rule change eliminates or 
reduces the privacy and operational concerns raised to the previous 
proposal, while educating former customers about important 
considerations to make an informed decision whether to transfer assets 
to the recruiting firm. Included among those considerations is that the 
recruiting firm may pay financial incentives to the representative, 
such as bonuses based on customer assets the representative brings in, 
incentives for selling proprietary products, and higher commission 
payouts.
Triggers To Provide the Educational Communication
    As proposed in the Notice 15-19 Proposal, the requirement to 
provide the educational communication would have been triggered when: 
(1) The member, directly or through the recruited registered person, 
attempted to induce the former customer of that registered person to 
transfer assets; or (2) the former customer of that registered person, 
absent inducement, transferred assets to an account assigned, or to be 
assigned, to the registered person at the member. Commenters opposed 
basing the requirement to provide the educational communication on any 
attempt to ``induce'' a former customer to transfer assets to the 
recruiting firm because they viewed the term as undefined and 
imprecise, resulting in operational and supervisory challenges for 
members.\24\
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    \24\ See SIFMA, FSR, LPL, Ameriprise, Wells Fargo, Janney, and 
HD Vest.
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    As discussed in greater detail in Item II.A., FINRA believes that a 
broad range of communications by a recruiting firm, directly or through 
a representative, with former customers may reasonably be seen as 
individually contacting the former customer to transfer assets to the 
recruiting firm and, as such, would trigger the delivery of the 
educational communication under the proposed rule change. To lessen any 
potential confusion regarding whether a communication by a member, 
directly or through the representative, with a former customer was an 
inducement to transfer assets, FINRA has revised the proposal to remove 
the reference to ``inducement'' of former customers. FINRA instead 
proposes to trigger 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.
    Some commenters stated that the requirement to provide the 
communication following the first individualized contact with a former 
customer would be unworkable as members would need to rely on 
representatives to report the contacts with former customers.\25\ One 
commenter also stated that the different delivery requirements based on 
whether there was individualized contact would be unworkable as members 
would have difficulty delineating between transfers of assets following 
individualized contact and those occurring absent individualized 
contact.\26\
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    \25\ See Commonwealth and HD Vest.
    \26\ See Commonwealth.
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    The proposed rule change retains the delivery triggers in the 
Notice 15-19 Proposal. 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. As such, FINRA does not believe the

[[Page 81595]]

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.
    Furthermore, 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 or other 
support for their contention that the delivery requirements would be 
unworkable for recruiting firms.
    One commenter suggested that FINRA include additional language in 
the proposed rule that a former customer may transfer absent 
individualized contact and provided examples of transfers absent 
individualized contact.\27\ FINRA notes that proposed Rule 2273(a) and 
(b)(2) address the application of the proposed rule to transfers 
occurring absent individualized contact. Among other things, FINRA 
would consider a former customer's decision to transfer assets to the 
recruiting firm in response to a general advertisement or after 
learning of the representative's transfer from another former customer 
as examples of transfers to the recruiting firm absent individualized 
contact.
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    \27\ See CAI.
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Timing of Delivery of the Educational Communication
    FINRA also received comments regarding the timing of delivery of 
the educational communication. Some commenters supported requiring the 
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.\28\
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    \28\ See Schwab and PIABA.
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    However, several commenters suggested that the requirement to 
deliver the educational communication should 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.\29\ One 
commenter suggested that the requirement to deliver the educational 
communication should be integrated into verification letters to 
customers sent in compliance with Rule 17a-3 under the Exchange 
Act,\30\ while another commenter recommended disclosing any 
recruitment-related compensation received by the representative in 
writing to the former customer at the time of the first individualized 
contact with the former customer.\31\
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    \29\ See SIFMA, FSR, FSI, CAI, Commonwealth, Lincoln, LPL, 
Ameriprise, Wells Fargo, Janney, and HD Vest.
    \30\ See Leaders Group.
    \31\ See Edward Jones.
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    The proposed rule change retains the requirement that a member 
deliver the educational communication at the time of first 
individualized contact with a former customer by the member, directly 
or through the representative, regarding the former customer 
transferring assets to the member. FINRA believes requiring delivery of 
the communication at the time of first individualized contact is more 
effective than requiring delivery of the communication at or prior to 
account opening because customers typically have already made the 
decision to transfer assets by that point in the process. FINRA 
believes the same problem exists with respect to a verification letter 
sent in compliance with Rule 17a-3 under the Exchange Act. FINRA does 
not believe that it is particularly burdensome to require members to 
include as part of a written communication to former customers a non-
customized, FINRA-created educational communication 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 to be 
effective, the proposed educational communication should 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.
    Finally, for the reasons discussed in more detail above, the 
proposed rule change no longer mandates specific disclosure of 
financial incentives received by the representative. As such, the 
suggestion to require that representatives disclose any recruitment-
related compensation received by the representative in writing at the 
time of the first individualized contact with the former customer is 
inconsistent with the approach in the proposed rule change to identify 
important considerations for former customers and prompt further 
inquiry to the extent any of those considerations are of concern or 
interest to the customer. Moreover, the suggestion would reintroduce 
the privacy and operational challenges raised by many commenters to the 
Rule 2243 Proposal. Accordingly, FINRA declines to include the 
suggested requirement.
Requirement To Provide Educational Communication Following Oral Contact
    Under the proposed rule change (as reflected in the Notice 15-19 
Proposal), if the first individualized contact with the former customer 
is oral, the member or representative would have 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.
    Some commenters to the Notice 15-19 Proposal proposed changing the 
delivery requirement to provide the communication not later than three 
business days after such oral contact to a longer time period (e.g., 
delivering the communication not later than 3, 7, or 10 business days 
after such contact).\32\ The commenters stated that a three business 
day period for providing the educational communication would be 
insufficient and would lead to operational and supervisory challenges 
for members in complying with the requirement. On the other hand, one 
commenter stated that providing the educational communication within 
three business days was too late as many customers will make a 
determination to transfer assets prior to receiving the 
communication.\33\
---------------------------------------------------------------------------

    \32\ See SIFMA, FSR, CAI, Cambridge, Leaders Group, Lincoln, 
LPL, RJA, RJFS, Ameriprise, and HD Vest.
    \33\ See Edward Jones.
---------------------------------------------------------------------------

    The proposed rule change retains the three business day period 
proposed in the Notice 15-19 Proposal. The commenters who objected to 
the requirement to provide the communication not later than three 
business days after individualized contact generally supported instead 
integrating the delivery of the educational communication with an 
existing process (e.g., the account transfer approval documentation). 
As discussed above, FINRA believes requiring delivery of the 
communication at first individualized contact is more effective than 
delivering the communication at or prior to account opening because 
customers typically have already made the decision to transfer assets 
by that point in the process. FINRA believes that the three business 
day period gives a representative sufficient time to inform

[[Page 81596]]

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. FINRA understands that firms 
frequently send account opening documentation within that time frame to 
customers that have indicated an interest in opening an account.
    One commenter stated that FINRA should clarify that the three 
business day period is for transmission of the educational 
communication by the member and not for receipt of the communication by 
the customer.\34\ Proposed Rule 2273(b)(1)(B) expressly provides that 
the educational communication must be ``sent'' within three business 
days from oral contact or with any other documentation sent to the 
former customer related to transferring assets to the member, whichever 
is earlier.
---------------------------------------------------------------------------

    \34\ See CAI.
---------------------------------------------------------------------------

Duration of Delivery Requirement
    The Notice 15-19 Proposal would have required the recruiting firm 
to provide the educational communication to former customers for a 
period of six months following the date the representative begins 
employment or associates with the member. The proposal requested 
comment on whether a different time period should apply.
    Some commenters supported shortening the length of the applicable 
period as communications between a representative and former customers 
typically occur quickly following the representative's transfer to the 
recruiting firm. For example, one commenter indicated that six months 
was too long of a period but did not offer an alternative period.\35\ 
Another commenter proposed shortening the period to 60 days.\36\ 
Another group of commenters proposed shortening the period to 90 
days.\37\ Other commenters supported extending the time period beyond 
six months. Two commenters supported extending the period to one 
year.\38\ One commenter supported extending the period beyond six 
months but did not propose an end date.\39\
---------------------------------------------------------------------------

    \35\ See Cambridge.
    \36\ See HD Vest.
    \37\ See SIFMA, Commonwealth, RJA, RJFS, Wells Fargo, and 
Janney.
    \38\ See Schwab and PIABA.
    \39\ See Burns.
---------------------------------------------------------------------------

    Based on feedback from the industry, FINRA believes that the 
representatives who individually contact former customers to transfer 
assets typically do so soon after being hired or associating with the 
recruiting firm. In addition, FINRA recognizes that tracking contacts 
with former customers may be more difficult as time passes from the 
date of the representative's hire or association. In recognition of 
these factors, the proposed rule change provides that the delivery of 
the educational communication shall apply for three months following 
the date the representative begins employment or associates with the 
member. FINRA believes a three-month period will effectively achieve 
the regulatory objective while lessening the operational and 
supervisory burdens on firms.
Requirement To Deliver Educational Communication in Certain Contexts
    Commenters requested that FINRA clarify the application of the 
Notice 15-19 Proposal to or provide an exemption for circumstances in 
which the representative is not individually recruited to transfer to a 
new firm (e.g., when the representative transfers firms as a result of 
a merger or acquisition).\40\ For example, one commenter suggested that 
members should not be required to deliver the educational communication 
to former customers with application-way accounts held directly with a 
product sponsor where the only change is a substitution of the member 
associated with the account.\41\ Similarly, one commenter suggested 
that the requirement to deliver the communication when there is only a 
change of broker-dealer of record and no costs to the former customer 
may cause customer confusion.\42\ One commenter supported the inclusion 
of a statement in the text of the proposed educational communication 
that in certain instances the decision to transfer firms was made by 
the representative's employer and not by the representative.\43\
---------------------------------------------------------------------------

    \40\ See SIFMA and FSI.
    \41\ See HD Vest.
    \42\ See Leaders Group.
    \43\ See LPL.
---------------------------------------------------------------------------

    FINRA recognizes that a representative may transfer to a new firm 
in circumstances where the decision may not be completely volitional 
(e.g., as a result of a merger or acquisition or due to a firm going 
out of business). In such cases, depending on the facts and 
circumstances, the accounts of the representative's customers may be 
transferred to the new firm via bulk transfer, and, in some cases, 
customers may receive only a negative response letter regarding the 
transfer of their accounts to a new firm.\44\ While a customer may 
object to the transfer of his or her account to a new firm via bulk 
transfer, the customer may be unable to maintain the assets in the 
account at his or her current firm in their current form or the current 
firm may not be willing to service the account as it has done so in the 
past. As such, 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.
---------------------------------------------------------------------------

    \44\ See, e.g., Regulatory Notice 02-57 (Sept. 2002) and 
Regulatory Notice 15-22 (June 2015).
---------------------------------------------------------------------------

    Similarly, a change of broker-dealer of record for a customer's 
account in the application-way business context typically does not 
present the same considerations for customers related to costs, 
portability, and differences in products, services and fees between the 
firms as in circumstances where a representative individually contacts 
a former customer to transfer assets to a new firm.
    In short, these circumstances do not present the investor 
protection dimensions that the Notice 15-19 Proposal was intended to 
address. In recognition of the different considerations faced by 
customers whose accounts may be transferred via bulk transfer or as a 
result of a change of broker-dealer of record, FINRA proposes to 
interpret the proposed rule change as not applying to circumstances 
where a customer's account is proposed to be transferred to a new firm 
via bulk transfer or due to a change of broker-dealer of record. FINRA 
will read with interest comments regarding whether the educational 
communication should apply in such circumstances and the impact of any 
exclusion from the rule for these circumstances.
Supervisory and Operational Issues
    One commenter suggested that FINRA state in the proposed rule or 
supplementary material to the proposed rule that appropriate 
supervisory procedures to implement the educational delivery 
requirement would be deemed to exist if a member were to mandate 
training, spot checks, and certifications.\45\ This suggestion is 
apparently based on a statement in the Notice 15-19 Proposal that, in 
supervising the educational communication requirement, FINRA believes 
that firms can implement a system reasonably designed to achieve 
compliance with the Notice 15-19 Proposal by using training, spot 
checks, certifications, or other measures.

[[Page 81597]]

Training, spot checks, and certifications were used as examples of 
approaches that might be included in a supervisory system reasonably 
designed to achieve compliance with the proposed rule. However, because 
firms vary in size, scope of business and client base, FINRA declines 
to suggest a one-size-fits-all supervisory system to achieve compliance 
with the educational communication requirement.
---------------------------------------------------------------------------

    \45\ See CAI.
---------------------------------------------------------------------------

    One commenter supported revising the Notice 15-19 Proposal to 
expressly include supervisory procedures for members to adopt to 
implement the requirement.\46\ FINRA notes that FINRA Rule 3110 already 
requires that members have in place supervisory procedures reasonably 
designed to achieve compliance with FINRA rules. As such, FINRA is not 
including a specific requirement within the proposed rule change 
requiring members to adopt specific supervisory procedures.
---------------------------------------------------------------------------

    \46\ See PIABA.
---------------------------------------------------------------------------

    Some commenters stated that, even if effective supervisory 
procedures existed for the educational communication requirement, the 
training, implementation, and maintenance of supervisory controls 
related to the Notice 15-19 Proposal would present considerable costs 
to firms.\47\ Commenters also stated that, in order to demonstrate 
compliance with the Notice 15-19 Proposal, members would need to keep 
records related to former customers who have been contacted by the 
member or representative but who have not yet opened an account with 
the recruiting firm and that such a recordkeeping system would result 
in costs to the recruiting firm.\48\
---------------------------------------------------------------------------

    \47\ See RJA, RJFS, and HD Vest.
    \48\ See Cambridge and HD Vest.
---------------------------------------------------------------------------

    FINRA does not believe that the training, implementation, and 
maintenance of supervisory controls related to the proposed rule change 
(as reflected in the Notice 15-19 Proposal) impose an unreasonable 
burden on members. Members already are obligated to supervise 
representatives' communications with customers and have flexibility to 
design their supervisory systems. FINRA does not believe that requiring 
a member to maintain a record of former customers contacted by the 
member, directly or through the representative, and to deliver the 
required educational communication would appreciably increase the 
existing burden on firms. As noted above, commenters did not provide 
specific data or other support for their contention that establishing 
supervisory controls related to the Notice 15-19 Proposal would present 
considerable costs to firms.
    FINRA believes that the investor protection benefits of providing 
the important information contained in the educational communication to 
former customers to inform their decision whether to transfer assets to 
their representative's new firm are reasonably aligned with any costs 
that may arise under the proposed rule change.
Customer Affirmation
    The Notice 15-19 Proposal requested comment on whether the proposed 
rule should include a requirement that a customer affirm receipt of the 
educational communication at or before account opening at the 
recruiting firm. Some commenters did not support requiring customer 
affirmation of the receipt of the educational communication.\49\ Other 
commenters supported requiring customer affirmation of the receipt of 
the educational communication.\50\
---------------------------------------------------------------------------

    \49\ Id.
    \50\ See PIABA, NAIFA, and Burns.
---------------------------------------------------------------------------

    While some firms may elect to include a customer affirmation 
requirement as part of their supervisory controls in implementing the 
proposed rule change, the proposed rule change does not incorporate a 
customer affirmation requirement. FINRA believes that the requirements 
to provide the educational communication 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 information in the proposed educational communication 
before they decide to transfer assets to a recruiting firm. 
Furthermore, FINRA wishes to avoid adding an additional requirement to 
the proposed rule that may impede the timely transfer of customer 
assets between members.
    At this time, FINRA does not believe that a customer affirmation is 
necessary to accomplish the goals of the proposed rule change. FINRA 
will assess the effectiveness of the educational communication 
requirement without a customer affirmation requirement following 
implementation of the proposed rule. If FINRA finds that the proposed 
educational communication alone is not attracting the attention of 
customers to influence their decision-making process, then it will 
reconsider a customer affirmation requirement.
Focus of the Educational Communication
    Some commenters indicated that the proposed educational 
communication is too focused on conflicts of interest that may be 
created by the financial incentives received by a representative for 
transferring firms.\51\ Some commenters stated that the proposed 
educational communication puts transferring representatives at a 
disadvantage and may interject a false sense of distrust between former 
customers and transferring representatives.\52\ One commenter stated 
that the educational communication runs the risk of creating 
unnecessary customer confusion or alarm, as former customers may 
believe that it is their responsibility to police costs and 
suitability.\53\
---------------------------------------------------------------------------

    \51\ See RJA, RJFS and NAIFA.
    \52\ See Cambridge, Steiner & Libo, CLM Ventura, Lax & Neville 
and Janney.
    \53\ See Cambridge.
---------------------------------------------------------------------------

    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 is 
intended to highlight a broad range of potential implications of 
transferring assets to the recruiting firm, and customers can engage in 
further conversations with the recruiting firm or their representative 
in areas of personal concern or interest. While the proposed 
educational communication notes that a former customer may wish to 
consider whether financial incentives received by the representative 
may create a conflict of interest, it is not particularly focused on 
that consideration. The educational communication also notes that the 
former customer may wish to consider whether: (1) 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; (2) 
potential costs related to transferring assets to the recruiting firm, 
including differences in the pricing structure and fees imposed between 
the customer's current firm and the recruiting firm; and (3) 
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, if necessary, the customer's current 
firm). Furthermore, to the extent that the former customer is unsure 
about whether the information

[[Page 81598]]

in the educational communication is applicable to his or her account, 
FINRA believes that it is reasonable to expect the representative and 
the customer's current firm to discuss the information and the 
customer's assets and account with the customer.
    One commenter stated that before imposing the educational 
communication requirement, FINRA should establish that a real or 
potential conflict of interest exists in every transaction and that 
there is evidence of systemic problems with the account transfer 
process or the current disclosure regime to justify the costs 
associated with the proposed rule change.\54\ FINRA disagrees with the 
commenter's premise. FINRA has identified an important investor 
protection objective (i.e., that former customers should be made aware 
of material information to make an informed decision about transferring 
assets where there may be conflict, cost, and product and service 
implications). Furthermore, as discussed above, FINRA tested the 
educational communication with a diverse group of retail investors, who 
indicated that the educational communication effectively conveyed 
important and useful information. There is no basis to require that 
FINRA establish that a real or potential conflict of interest exists in 
``every'' transaction or that there are systemic problems with the 
account transfer process or the current disclosure regime in order to 
promulgate an informed decision rule or any other type of rule.
---------------------------------------------------------------------------

    \54\ See Lax & Neville.
---------------------------------------------------------------------------

    This commenter also stated that the discussions of investor testing 
of, and the economic impact assessment for, the proposed educational 
communication in the Notice 15-19 Proposal were insufficient as they 
failed to address: (1) Whether any of the information in the 
communication is material to a former customer's decision to transfer 
assets to the recruiting firm; (2) how the Protocol \55\ may or may not 
address the issues that the Notice 15-19 Proposal is trying to address; 
and (3) how existing FINRA rules protect former customers from 
harm.\56\
---------------------------------------------------------------------------

    \55\ See supra note 5.
    \56\ Id.
---------------------------------------------------------------------------

    As discussed above, FINRA tested the educational communication with 
a diverse group of retail investors, who indicated that the educational 
communication effectively conveyed important and useful information. 
Investors also indicated that the communication identified issues to 
consider that they had previously been unaware of and that would be 
meaningful in making a decision whether to transfer assets to the 
representative's new firm. FINRA believes that potential conflicts of 
interest, portability, costs, including differences in the pricing 
structure and fees and tax implications due to liquidation of assets, 
and differences in products and services are material to many former 
customers' decision whether to transfer assets.\57\ FINRA also believes 
that the educational communication may encourage customers to explore 
the potential cost of transferring assets, including the fees charged 
by the prior firm. However, if these considerations are not material to 
a customer's decision whether to transfer assets to the recruiting 
firm, the customer may disregard them.
---------------------------------------------------------------------------

    \57\ FINRA notes that the New York Stock Exchange has published 
a similar educational communication entitled ``If Your Broker 
Changes Firms, What Do You Do?'' (``NYSE Communication'') that also 
highlights these considerations for investors who are considering 
transferring assets to a representative's new firm.
---------------------------------------------------------------------------

    FINRA also notes that the Protocol governs the employment 
transitions of representatives of signatory firms--such as what 
information is categorized as confidential and is restricted from being 
moved from one firm to the other--and does not address the issues that 
are highlighted in the proposed communication (e.g., the Protocol would 
not require a representative to discuss differences in products and 
services between firms with a customer who is considering transferring 
firms). As such, FINRA believes that the Protocol's focus on employment 
transitions is easily distinguishable from the intention of the 
proposed educational communication in educating former customers.
    With respect to how existing FINRA rules protect former customers 
from harm, there is no current rule that requires representatives to 
inform former customers in a timely manner of the potential 
implications of transferring assets, so as to allow them to make an 
informed decision that may have cost and service implications, among 
others. FINRA believes that the proposed rule change is easily 
distinguishable from and serves a different purpose than other 
currently existing FINRA rules.
Length of and Terms in the Educational Communication
    Some commenters suggested that the proposed educational 
communication should be streamlined to reduce its length.\58\ FINRA 
believes that the proposed educational communication strikes an 
appropriate balance between brevity and providing clear and useful 
information to former customers.
---------------------------------------------------------------------------

    \58\ See Leaders Group and NAIFA.
---------------------------------------------------------------------------

    Some commenters supported replacing the term ``broker'' in the 
educational communication with a different, more ``modern'' term (e.g., 
registered representative, registered person, financial advisor, or 
advisor).\59\ FINRA 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. FINRA notes that the NYSE Communication also uses 
the term ``broker.''
---------------------------------------------------------------------------

    \59\ See SIFMA, Ameriprise, and Janney.
---------------------------------------------------------------------------

Application to the Former Customer's Current Firm
    The proposed rule change (as reflected in the Notice 15-19 
Proposal) would impose the requirement to deliver the educational 
communication on the recruiting firm only. One commenter to the Notice 
15-19 Proposal supported requiring a former customer's current firm to 
deliver the communication, if the current firm attempts to induce the 
former customer to stay at his or her current firm.\60\ This commenter 
also supported revising the substance of the proposed educational 
communication to include questions that a former customer might 
consider if the current firm is soliciting the former customer to stay 
at the current firm.\61\ Similarly, some commenters suggested revising 
the substance of the proposed educational communication to address 
incentives that the current firm may offer the customer to stay with 
the current firm \62\ or incentives that employees of the current firm 
may receive to retain the customer.\63\
---------------------------------------------------------------------------

    \60\ See Lincoln.
    \61\ Id.
    \62\ See CLM Ventura, Lax & Neville and Janney.
    \63\ See PIABA.
---------------------------------------------------------------------------

    With the proposed rule change, 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 certain potential 
conflicts (e.g., financial incentives to attract new assets) are more 
pronounced. The proposed educational communication is intended to 
prompt the customer to ask questions of his or her representative and, 
if necessary, current firm. While the proposed rule change would not 
require the current firm to provide the

[[Page 81599]]

educational communication to a customer, the proposed educational 
communication does note that ``some firms pay financial incentives to 
retain brokers or customers.'' 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.
Contractual and Legal Considerations
    One commenter suggested adding supplementary material to the Notice 
15-19 Proposal clarifying that the proposed rule would not excuse 
compliance with applicable privacy, trade secret, or contractual 
obligations. Some commenters indicated that delivery of the proposed 
educational communication could be seen as evidence that a 
representative solicited former customers in violation of contractual 
restrictions and, as a result, be used as evidence in litigation.\64\ 
Other commenters recommended that FINRA clarify that the proposed rule 
would govern only the educational communication requirement and should 
not be used as evidence for any other purpose, including that a former 
customer was improperly solicited.\65\ One commenter suggested that 
FINRA state that the proposed rule would not affect the ability of 
firms to use employment agreements to prevent representatives from 
taking customer information.\66\
---------------------------------------------------------------------------

    \64\ See Cambridge and LPL.
    \65\ See SIFMA and HD Vest.
    \66\ See Schwab.
---------------------------------------------------------------------------

    One commenter suggested that FINRA confirm that the proposed rule 
does not require or create a presumption in favor of a member sharing a 
former customer's information with a transferring representative or the 
recruiting firm.\67\ One commenter stated that FINRA should clarify: 
(1) How members are supposed to comply with Regulation S-P; and (2) 
that the proposed rule change would supersede any private contractual 
restriction on representatives taking customer information.\68\ Another 
commenter supported a code of conduct requirement for member responses 
to customer inquiries prompted by the educational communication to 
avoid confusion or litigation.\69\
---------------------------------------------------------------------------

    \67\ See Edward Jones.
    \68\ See HD Vest.
    \69\ See Lax & Neville.
---------------------------------------------------------------------------

    FINRA does not agree that the proposed rule change 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 is not intended 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.\70\ 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.\71\ 
For example, FINRA 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.
---------------------------------------------------------------------------

    \70\ See 17 CFR 248.15(a)(7)(i).
    \71\ As noted above, the Protocol permits representatives of 
firms that have signed the Protocol to 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. See supra note 5.
---------------------------------------------------------------------------

    Some commenters indicated that, due to privacy agreements or 
Regulation S-P, representatives may not have information available to 
answer customer inquiries prompted by the educational 
communication.\72\ One commenter indicated that FINRA should provide 
guidance that it is permissible for a representative to inform a former 
customer that specific information may not be available to answer the 
former customer's question unless the former customer provides his or 
her account information to the representative.\73\ To the extent that a 
representative or member does not have access to information so as to 
be able to answer a customer's inquiry, FINRA believes that it is 
reasonable to expect the representative or member to explain the 
situation to the customer and detail any information that is needed in 
order to answer the inquiry. FINRA believes that such a conversation 
may occur in different contexts outside the scope of the proposed rule 
change (e.g., when a customer asks his or her representative a question 
regarding a retirement account or college savings account held outside 
the representative's firm) and that representatives and members have 
experience in dealing with these types of conversations.
---------------------------------------------------------------------------

    \72\ See RJA, RJFS, and HD Vest.
    \73\ See Burns.
---------------------------------------------------------------------------

    One commenter stated that the discussions of investor testing of, 
and the economic impact assessment for, the proposed educational 
communication in the Notice 15-19 Proposal were insufficient as they 
failed to address costs that may be associated with potential increased 
litigation related to delivery of the educational communication being 
seen as impermissible solicitation of former customers or some other 
contractual or legal violation.\74\ As noted above, FINRA does not 
believe the proposed rule change would, and does not intend the 
proposed rule change to: (1) Impact any contractual agreement between a 
representative and his or her former firm or new firm; or (2) require 
members to disclose information in a manner inconsistent with 
Regulation S-P. As noted above, to the extent that a firm brings a 
legal challenge against a representative or his or her new firm, FINRA 
does not intend for the delivery of the educational communication 
pursuant to the proposed rule change to have any relevance to determine 
whether or not a representative or the new firm has engaged in improper 
solicitation of former customers or has committed some other 
contractual or legal violation. Further, the information contained in 
the educational communication is generic, making no reference to any 
firm or registered representative, and comparable to other public 
information that may be shared, such as a news article. As such, FINRA 
believes that the educational communication provides no unique 
information intended to encourage or discourage transfer of assets.
---------------------------------------------------------------------------

    \74\ See Lax & Neville.
---------------------------------------------------------------------------

Exemptions
    Some commenters to the Notice 15-19 Proposal proposed creating a de 
minimis exemption from the requirement to deliver the educational 
communication if the representative has received or will receive less 
than $100,000 of either aggregate upfront payments or aggregate 
potential future payments in connection with transferring to the 
recruiting firm.\75\ One commenter proposed creating a de minimis 
exemption for members: (1) With 150 or fewer representatives; (2) with 
no proprietary products in customer accounts; and (3) offering $50,000 
or less to representatives in

[[Page 81600]]

connection with transferring to the member.\76\
---------------------------------------------------------------------------

    \75\ See SIFMA, Schwab, and HD Vest.
    \76\ See Buckman.
---------------------------------------------------------------------------

    The proposed rule change does not include a de minimis exemption. 
Unlike the Rule 2243 Proposal, the proposed rule change would not 
require the calculation and disclosure of ranges of recruitment-related 
compensation that have been or will be received by a transferring 
representative. Rather, the proposed educational communication would 
highlight issues beyond potential conflicts of interest that may be 
created by the receipt of financial incentives, including issues 
related to portability, costs, including differences in the pricing 
structure and fees and tax implications due to liquidation of assets, 
and differences in products and services. As such, an exemption based 
on the amount of financial incentives paid to the representative would 
deprive former customers of the other important considerations. Given 
its scope and requirements, FINRA does not believe that a de minimis 
exemption is appropriate for the proposed rule change.
    Furthermore, a de minimis exemption would reintroduce the 
requirement that a recruiting firm calculate the representative's 
current and future recruitment-related compensation in order to 
determine whether the de minimis exemption would be available. 
Commenters to the Rule 2243 Proposal cited several operational 
challenges to the requirement to calculate recruitment-related 
compensation.
    One commenter proposed creating an exemption from the requirement 
to deliver the educational communication if none of the issues 
identified in the communication are applicable to the representative's 
association with the recruiting firm.\77\ FINRA believes that such an 
exemption would present implementation challenges for members as 
recruiting firms and representatives may be unable to determine that 
none of the issues identified in the communication are applicable to 
the transferring representative or former customer prior to delivering 
the educational communication to the former customer. Fundamentally, 
FINRA does not believe circumstances are likely to exist where none of 
the considerations identified in the educational communication are 
applicable to the representative's association with the recruiting 
firm. Accordingly, except as discussed above with respect to bulk 
transfers and changes in the broker-dealer of record in the 
application-way business context, FINRA does not intend to create an 
exception from the requirement to deliver the educational 
communication.
---------------------------------------------------------------------------

    \77\ See CAI.
---------------------------------------------------------------------------

    One commenter suggested creating an exemption from the requirement 
to deliver the educational communication for independent contractor 
model firms where, as stated by the commenter, the customers are not 
viewed as being ``own[ed]'' by the firm.\78\ FINRA believes that the 
potential implications of transferring assets to a recruiting firm 
highlighted in the communication are equally relevant to customers 
whose representatives are associated with independent contractor model 
firms. Accordingly, FINRA declines to create an exemption from the 
requirement to deliver the educational communication for independent 
contractor model firms.
---------------------------------------------------------------------------

    \78\ See American Investors Co.
---------------------------------------------------------------------------

Impact on Larger Firms
    Two commenters stated that the Notice 15-19 Proposal would have a 
disparate impact on larger firms that are more likely to attract 
representatives with a significant number of customers.\79\ FINRA notes 
that while larger firms may be more likely have representatives with a 
significant number of customers, larger firms also typically have 
greater resources as a result of a large client base. Due to these 
greater resources, FINRA believes that the proposed rule change does 
not create an unfair burden for large firms.
---------------------------------------------------------------------------

    \79\ See RJA and RJFS.
---------------------------------------------------------------------------

Application to Former Customers
    The Notice 15-19 Proposal requested comment on whether the proposal 
should apply beyond former customers to all customers recruited by the 
transferring representative during the six months after transfer. Some 
commenters did not support expanding the proposed rule to apply beyond 
former customers as defined in the proposal.\80\ One commenter 
supported expanding the requirement to apply to all customers of a 
representative, not just former customers.\81\ Another commenter 
supported expanding the requirement to apply beyond former customers, 
if the educational communication delivery requirement was integrated 
into the account transfer documentation process.\82\
---------------------------------------------------------------------------

    \80\ See Cambridge, NAIFA, and HD Vest.
    \81\ See PIABA.
    \82\ See FSI.
---------------------------------------------------------------------------

    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) other than 
accounts held by any natural person. 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. 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 
representatives and that the proposed educational communication would 
not have as significant an impact on their decision whether to transfer 
assets to a new firm.
FINRA-Created Educational Communication
    One commenter supported the use of a FINRA-created educational 
communication in lieu of a member-created communication.\83\ Other 
commenters supported permitting members to alter the educational 
communication to more closely correspond with each member's specific 
situation.\84\ One commenter supported permitting the educational 
communication to be integrated into a member's individualized account 
transfer process provided that the timing requirements of the proposed 
rule are satisfied and that the content is substantially similar to the 
content in the FINRA-created communication.\85\
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    \83\ See Ameriprise.
    \84\ See SIFMA and HD Vest.
    \85\ See CAI.
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    To facilitate members providing the educational communication at a 
relatively low cost and without significant administrative burden, 
FINRA has developed an educational communication for members to use to 
satisfy the requirements of the proposed rule change. To ensure that 
former customers receive uniform information and to ease implementation 
of the proposed rule change, FINRA does not propose to permit members 
to revise the communication or integrate the communication into other 
documents.
Reporting to FINRA
    The proposed rule change would not require a member to report to 
FINRA

[[Page 81601]]

significant increases in compensation paid to a representative that has 
former customers at the beginning of the employment or association of 
the representative with the member. One commenter to the Notice 15-19 
Proposal stated that it supported FINRA removing the reporting 
obligation that was included in the Rule 2243 Proposal.\86\ Consistent 
with the Notice 15-19 Proposal, the proposed rule change does not 
include a reporting obligation. However, FINRA will include potential 
customer harm resulting from recruitment compensation as part of its 
broader conflicts management review.
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    \86\ See Commonwealth.
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Treatment of Dual-Hatted Persons
    One commenter to the Notice 15-19 Proposal suggested adding 
supplementary material to the proposed rule to address scenarios where 
a representative dually registered as an investment adviser 
representative and broker-dealer representative transfers to a 
recruiting firm (e.g., that delivery of the communication may not be 
required if the representative served as an investment adviser 
representative and will be associated in the same capacity at the 
recruiting firm).\87\
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    \87\ See SIFMA.
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    The proposed rule change would apply to any registered person that 
transfers to a member and individually contacts a former customer 
(i.e., a customer that had a securities account assigned to the 
registered person at the registered person's previous firm) regarding 
transferring assets to the firm. The proposed rule change would apply 
to a registered person dually registered as an investment adviser and 
broker-dealer who associates with a member firm in both an investment 
advisory and broker-dealer capacity. The proposed rule change 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.

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-2015-057 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2015-057. 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-2015-057 and should be 
submitted on or before January 20, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\88\
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    \88\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-32816 Filed 12-29-15; 8:45 am]
BILLING CODE 8011-01-P


