FINRA Considering Rule for Bonus Disclosure

The Financial Industry Regulatory Authority Inc. (“FINRA”) Board of Governors voted to propose a rule during the December board meeting that would require brokers to disclose their recruitment incentives to customers. The suggestion is obviously getting a sharp reaction from the industry. Proponents of the rule argue that it is time that brokers disclose their compensation just like registered investment advisers (“RIA”) are required to disclose their fees. However, opponents of the rule state that the financial package received by a broker is not relevant to their customers.

Arthur Levitt, the SEC’s former chairman, called for recruitment packages disclosure in 1998, and in 1999, FINRA followed up this request with a rule proposal. However, the 1999 rule proposal was not promulgated at the time, primarily because of criticism around the issue of what compensation information should be disclosed to clients. For example, should a customer receive a disclosure stating their broker is now receiving a 32% commission payout instead of 25% because they have reached a higher production threshold?

While this December proposal has not yet been published and also requires SEC approval for adoption, the industry continues to push back on this potential requirement.  Brokers should pay special attention to this proposal because if adopted, the rule will require that any bonus/incentive payments received in the amount of $50,000 or more be disclosed for a period of one year from the date of move.  For additional information about this topic or any other compliance topic, please contact Andrew Deddeh at (619) 278-0020 or andrew.deddeh@corecls.com.