Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change to Adopt FINRA Rule 2273 (Educational Communication Related to Recruitment Practices and Account Transfers), 17513-17520 [2016-06995]

Download as PDF Federal Register / Vol. 81, No. 60 / Tuesday, March 29, 2016 / Notices 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 20549–1090, on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. 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–BX–2016–017 and should be submitted on or before April 19, 2016. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.9 Brent J. Fields, Secretary. [FR Doc. 2016–06994 Filed 3–28–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release Nos. 33–10058; 34–77432; File No. 265–28] Investor Advisory Committee Meeting AGENCY: Securities and Exchange Commission. ACTION: Notice of Meeting of Securities and Exchange Commission Dodd-Frank Investor Advisory Committee. mstockstill on DSK4VPTVN1PROD with NOTICES SUMMARY: The Securities and Exchange Commission Investor Advisory Committee, established pursuant to Section 911 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, is providing notice that it will hold a public meeting. The public is invited to submit written statements to the Committee. DATES: The meeting will be held on Thursday, April 14, 2016 from 9:30 a.m. until 3:45 p.m. (ET). Written statements should be received on or before April 14, 2016. 9 17 CFR 200.30–3(a)(12). VerDate Sep<11>2014 19:43 Mar 28, 2016 Jkt 238001 ADDRESSES: The meeting will be held in Multi-Purpose Room LL–006 at the Commission’s headquarters, 100 F Street NE., Washington, DC 20549. The meeting will be webcast on the Commission’s Web site at www.sec.gov. Written statements may be submitted by any of the following methods: Electronic Statements D Use the Commission’s Internet submission form (http://www.sec.gov/ rules/other.shtml); or D Send an email message to rulescomments@sec.gov. Please include File No. 265–28 on the subject line; or Paper Statements D Send paper statements to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File No. 265–28. This file number should be included on the subject line if email is used. To help us process and review your statement more efficiently, please use only one method. Statements also will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Room 1580, Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. All statements received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. FOR FURTHER INFORMATION CONTACT: Marc Oorloff Sharma, Senior Special Counsel, Office of the Investor Advocate, at (202) 551–3302, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549. SUPPLEMENTARY INFORMATION: The meeting will be open to the public, except during that portion of the meeting reserved for an administrative work session during lunch. Persons needing special accommodations to take part because of a disability should notify the contact person listed in FOR FURTHER INFORMATION CONTACT. The agenda for the meeting includes: Remarks from Commissioners; a discussion of a recommendation of the Investor as Purchaser subcommittee regarding mutual fund cost disclosure; an update from the Commission’s Office of Compliance Inspections and Examinations; subcommittee reports; a discussion regarding cybersecurity and related investor protection concerns; reflections on the first full term of Investor Advisory Committee membership; and a nonpublic PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 17513 administrative work session during lunch. Dated: March 23, 2016. Brent J. Fields, Secretary. [FR Doc. 2016–06988 Filed 3–28–16; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–77430; File No. SR–FINRA– 2015–057] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change to Adopt FINRA Rule 2273 (Educational Communication Related to Recruitment Practices and Account Transfers) March 23, 2016. I. Introduction On December 16, 2015, Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’), pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change 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 proposed rule change was published for comment in the Federal Register on December 30, 2015.3 The Commission received twelve comment letters on the proposal.4 On February 4, 2016, FINRA extended the time period for Commission action on the proposed rule change until March 29, 2016. On March 17, 2016, FINRA responded to 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Notice of Filing of a Proposed Rule Change to Adopt FINRA Rule 2273 (Educational Communication Related to Recruitment Practices and Account Transfers), Exchange Act Rel. No. 76757 (December 23, 2015), 80 FR 81590 (December 30, 2015) (‘‘Notice’’). 4 Comment letters were submitted by Georgia State University College of Law Investor Advocacy Clinic (‘‘GSU’’); Commonwealth Financial Network (‘‘Commonwealth’’); Securities Industry and Financial Markets Association (‘‘SIFMA’’); Financial Services Institute (‘‘FSI’’); Public Investors Arbitration Bar Association (‘‘PIABA’’); Wells Fargo Advisors (‘‘Wells Fargo’’); The Committee of Annuity Insurers (‘‘Committee of Annuity Insurers’’); Lincoln Financial Network (‘‘Lincoln’’); LPL Financial (‘‘LPL’’); Raymond James Financial Services (‘‘RJFS’’); Raymond James & Associates (‘‘RJA’’); and HD Vest Investment Services (‘‘HD Vest’’). 2 17 E:\FR\FM\29MRN1.SGM 29MRN1 17514 Federal Register / Vol. 81, No. 60 / Tuesday, March 29, 2016 / Notices the comments.5 The proposed rule change is unchanged from the original proposal. This order approves the proposed rule change. The text of the proposed rule change is available on FINRA’s Web site at http:// www.finra.org, at the principal office of FINRA, on the Commission’s Web site at http://www.sec.gov, and at the Commission’s Public Reference Room. mstockstill on DSK4VPTVN1PROD with NOTICES II. Description of the Proposed Rule Change Background FINRA is concerned that representatives who switch their member firm often contact former customers and emphasize the benefits the former customers would experience by following the representative and transferring their assets to the firm that recruited the registered representative (‘‘recruiting firm’’) and maintaining their relationship with the representative. In this situation, former customers’ confidence in and prior experience with the representative may be one of the customers’ most important considerations in determining whether to transfer assets to the recruiting firm. As stated in the Notice, 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 direct 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. As stated in the Notice, FINRA believes that former customers would benefit from receiving a concise, plainEnglish 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. Educational Communication The proposed rule change would require a member that hires or 5 Letter from Jeanette Wingler, Assistant General Counsel, FINRA, to Brent J. Fields, Secretary, Commission, dated March 17, 2016. VerDate Sep<11>2014 19:43 Mar 28, 2016 Jkt 238001 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.6 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.7 The educational communication focuses on important considerations for a former customer who is contemplating transferring assets to an account assigned to his or her former representative at the recruiting firm. The 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 recruiting firm (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 As stated in the Notice, 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.8 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’’); 9 (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. Furthermore, as stated in the Notice, 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.10 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. 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 the first individualized contact with a former customer by the member, 8 See 6 See proposed FINRA Rule 2273(a). 7 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. PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 Notice, supra note 3, 80 FR at 81591. 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. 10 See Notice, supra note 3, 80 FR at 81591. 9 The E:\FR\FM\29MRN1.SGM 29MRN1 mstockstill on DSK4VPTVN1PROD with NOTICES Federal Register / Vol. 81, No. 60 / Tuesday, March 29, 2016 / Notices directly or through the representative, regarding the former customer transferring assets to the member.11 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.12 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.13 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.14 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.15 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 11 See proposed FINRA Rule 2273(b)(1). proposed FINRA Rule 2273(b)(1)(A). 13 See proposed FINRA Rule 2273(b)(1)(B). 14 See proposed FINRA Rule 2273(b)(2). 15 See proposed FINRA Rule 2273(b)(3). 12 See VerDate Sep<11>2014 19:43 Mar 28, 2016 Jkt 238001 provided with the account transfer approval documentation.16 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.17 The proposed rule change would require members to provide the FINRA-created communication and would not permit members to use an alternative format.18 As stated in the Notice, FINRA believes that the FINRAcreated uniform educational communication will allow members to provide the required communication at a relatively low cost and without significant administrative burdens.19 III. Summary of Comment Letters and FINRA’s Response Overall Proposal Two commenters stated that the current proposal is an improvement from the previous version of the proposal.20 Eight additional commenters expressed support for a regulatory effort to provide investors with meaningful information upon which to base a decision to transfer assets but did not support all aspects of the current proposal.21 Two commenters opposed the current proposal and instead supported a return to the requirement in a previous version of the proposal to provide specific information about any financial incentives received by the representative and costs associated with the former customer transferring assets.22 Alternatively, another commenter suggested requiring the member to provide written answers to the questions included in the educational communication if the customer so requests.23 One commenter maintained that the proposal is not justified by its costs because there are no systemic issues with the current 16 See proposed FINRA Rule 2273.02 (Express Rejection by Former Customer). 17 See proposed FINRA Rule 2273(a) and Exhibit 3. 18 See proposed FINRA Rule 2273(a). 19 See Notice, supra note 3, 80 FR at 81592. 20 Lincoln and FSI. 21 SIFMA, LPL, Wells Fargo, RJFS, RJFA, Commonwealth, and HD Vest. 22 PIABA and GSU. 23 GSU. PO 00000 Frm 00091 Fmt 4703 Sfmt 4703 17515 account transfer process, which also includes some disclosure.24 In its response to commenters, FINRA states that it believes that the proposal 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. Furthermore, FINRA’s response to commenters notes that, as explained in more detail in the Notice, FINRA considered several alternatives to the proposal to help ensure that it is narrowly tailored to achieve its purposes without imposing unnecessary costs and burdens on members.25 FINRA believes that the proposed rule is an effective and efficient alternative to the previous proposal. While educating former customers about important considerations to make an informed decision whether to transfer assets to the recruiting firm, FINRA believes the proposed rule eliminates or reduces the privacy and operational concerns raised regarding the previous proposal (e.g., by removing the requirement to disclose to former customers the magnitude of recruitment compensation paid to a transferring representative). FINRA notes that the dialogue prompted by the educational communication could include a discussion with the transferring representative about more specifics related to the incentives and costs associated with the transfer. FINRA further states in its response to commenters that it believes that former customers would benefit from receiving a concise, plain-English document that highlights the potential implications of transferring assets, such as conflict and cost considerations, several of which are not disclosed or otherwise brought to the attention of a customer as part of the account transfer approval documentation. Requirement To Deliver the Educational Communication One commenter supported the proposal’s delivery requirements as providing a ‘‘clear and straightforward standard.’’ 26 The commenter further stated that with the ‘‘straightforward standard, firms will be able to easily create and implement policies, procedures and systems to comply with the rule.’’ 27 Some commenters, on the other hand, stated that the triggers for delivering the educational 24 HD Vest. Notice, supra note 3, 80 FR at 81593. 26 FSI. 27 FSI. 25 See E:\FR\FM\29MRN1.SGM 29MRN1 mstockstill on DSK4VPTVN1PROD with NOTICES 17516 Federal Register / Vol. 81, No. 60 / Tuesday, March 29, 2016 / Notices communication would be complex and difficult for members to implement as members would be dependent on reporting by representatives to members with respect to each individualized contact with a former customer.28 Some commenters commented that compliance with the proposed rule would require significant time and effort on the part of members and would result in significant costs.29 In its response to commenters, FINRA states that it does not believe that the 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. Moreover, FINRA’s response to commenters notes that, as FINRA stated in the Notice, members already are obligated to supervise representatives’ communications with existing or prospective customers and have flexibility to design their supervisory systems to track communications soliciting new business from former customers of representatives.30 As such, FINRA does not believe the proposed rule change imposes substantially new or burdensome obligations by requiring firms to establish policies and procedures reasonably designed to ensure that the educational communication is timely delivered to former customers. One commenter stated that a member cannot supervise communications between representatives and former customers before such customers establish accounts at the member.31 In its response to commenters, FINRA states that it disagrees. If a representative is associated with or employed by a member, FINRA notes that the member is required to supervise the representative’s conduct consistent with FINRA rules, including FINRA Rule 2210 (Communications with the Public). FINRA notes that the standards applicable to retail communications and correspondence under Rule 2210, as well as the requirements to supervise correspondence pursuant to FINRA Rule 3110 (Supervision), are not limited to communications with current customers. FINRA states that therefore, the fact that a former customer or any other individual has not yet established an account at the member does not obviate those supervision requirements. Individualized Contact Some commenters requested additional guidance as to what individualized contact with a former customer would trigger the requirement to deliver the educational communication.32 FINRA’s response to commenters notes that, as stated in the Notice, it intends for a broad range of oral or written communications by a recruiting firm, directly or through a representative, to constitute individualized contact with a former customer to transfer assets and therefore trigger the delivery of the educational communication under the proposed rule.33 FINRA notes that the Notice provides several examples of such individualized contacts, including a written or oral communication informing the customer that the representative is now associated with the recruiting firm.34 In its response to commenters, FINRA states that it will consider giving additional guidance, as appropriate, where questions about specific types of individualized contact arise. The proposed rule change would require delivery of the educational communication, absent individualized contact, with account transfer approval documentation. One commenter supported requiring delivery of the educational communication to a former customer, where there is not individualized contact, before the transmittal of the account transfer approval documentation.35 FINRA’s response to commenters notes that to lessen any associated operational and supervisory burdens of implementing the proposed rule, FINRA has not proposed requiring that the educational communication be provided to former customers before the account transfer approval documentation where there is not individualized contact. One commenter expressed the view that the different delivery requirements based on whether there was individualized contact would be unworkable as members could not reasonably determine that the receipt of account paperwork was the result of no contact between the registered person and the former customer.36 FINRA’s response to commenters states that, as set forth in the Notice, FINRA believes that a representative reasonably should know whether an individual had an account assigned to him or her at the representative’s prior 32 SIFMA, 28 Commonwealth and HD Vest. 29 Commonwealth and HD Vest. 30 See Notice, supra note 3, 80 FR at 81595. 31 HD Vest. VerDate Sep<11>2014 19:43 Mar 28, 2016 Jkt 238001 HD Vest, RJA, and RJFS. Notice, supra note 3, 80 FR at 81591. 34 See Notice, supra note 3, 80 FR at 81591. 35 GSU. 36 Commonwealth. 33 See PO 00000 Frm 00092 Fmt 4703 Sfmt 4703 firm and whether the representative has individually contacted the former customer regarding transferring assets to the recruiting firm.37 FINRA also states in its response to commenters that it believes that a reasonably designed supervisory system would require the representative to communicate with a member whether he or she had individualized contact with a former customer. As such, FINRA does not believe it is unworkable to distinguish account transfers that resulted absent individualized contact. Some commenters requested clarification regarding whether the requirements of the proposed rule would be triggered by ‘‘unanticipated communications’’ between a representative and a former customer.38 In its response to commenters, FINRA explains that the proposed rule would apply where a member, directly or through a representative, individually contacts a former customer of that representative to transfer assets or where a former customer transfers assets to an account assigned to the representative at the member absent individualized contact. As such, FINRA notes that whether contact that occurs with a former customer is planned or serendipitous is not dispositive; rather, it is the substance of the communication that determines if the delivery requirement is triggered. Thus, FINRA explains that unanticipated contact with a former customer (e.g., at a sporting or social event) without a communication from the representative to the former customer that would constitute individualized contact, as described above, about transferring assets would not trigger the requirements of the proposed rule. In its response to commenters FINRA notes that, if, for example, the representative took the opportunity of the situation to inform the former customer of his or her move to a new firm and the merits of transferring assets to that new firm, the delivery requirement would be triggered. Timing and Delivery of Educational Communication Several commenters expressed concern with the means and timing of the delivery requirement. Some commenters contended that the requirement to deliver the educational communication within three business days after oral contact by a representative with a former customer would present operational and supervisory challenges, such as training 37 See Notice, supra note 3, 80 FR at 81594. LPL, RJA, and RJFS. 38 Lincoln, E:\FR\FM\29MRN1.SGM 29MRN1 Federal Register / Vol. 81, No. 60 / Tuesday, March 29, 2016 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES representatives on the scope and practical implications of the requirement, relying on representatives to timely report contacts to the member, and preparing the mailing to former customers within the required period of time.39 One commenter suggested eliminating the requirement to deliver the educational communication within three business days after oral contact and instead require written delivery in all circumstances.40 Along with that commenter, some commenters suggested that the requirement to deliver the educational communication 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.41 Alternatively, one commenter suggested lengthening the period to deliver the educational communication to 10 business days.42 One commenter requested additional analysis and justification for FINRA’s belief that delivering the communication at or prior to account opening would be too late because customers typically have already made the decision to transfer assets by that point in the process.43 Another commenter stated that requiring the educational communication to accompany the first written communication would mean that any efforts taken by a member to review written communications that have already occurred between a representative and a former customer would be too late to prevent a rule violation.44 FINRA’s response to commenters notes that with respect to delivery after oral contact, as stated in the Notice, FINRA believes that the three-businessday period gives a representative sufficient time to inform 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.45 Furthermore, as stated in its response to commenters, FINRA understands that members frequently send account opening documentation within that time frame to customers that 39 SIFMA, Committee of Annuity Insurers, Lincoln, RJA, RJFS, Commonwealth, and HD Vest. 40 Wells Fargo. 41 Wells Fargo, SIFMA, Lincoln, Committee of Annuity Insurers, RJA, RJFS, Commonwealth, and HD Vest. 42 HD Vest. 43 SIFMA. 44 Commonwealth. 45 See Notice, supra note 3, 80 FR at 81595– 81596. VerDate Sep<11>2014 19:43 Mar 28, 2016 Jkt 238001 have indicated an interest in opening an account. FINRA also notes that it sought data and evidence around the associated costs of the proposed rule and that commenters did not provide specific data or analysis to support their contention that the delivery requirements as proposed would present considerable additional costs for recruiting firms. Accordingly, FINRA does not propose to change the requirement in the proposed rule. As explained in its response to commenters and in more detail in the Notice, FINRA believes that to be effective, the proposed educational communication must 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.46 In its response to commenters, FINRA notes that the delivery requirement will allow the customer the time needed to have discussions with the registered representative and the customer’s current firm about the implications of transferring assets in close proximity to receipt of any information the representative may have provided to encourage a transfer and will facilitate an informed and reasoned decision. FINRA further notes that some commenters to its Regulatory Notice 15– 19,47 where FINRA first proposed the delivery requirements, noted the benefits of timely delivery. FINRA points out that two commenters to Regulatory Notice 15–19 supported requiring 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.48 FINRA also notes that another brokerdealer commenter that favored contemporaneous delivery of the educational communication at the time of first individualized contact stated that permitting three business days following an oral communication was too late as many customers will make a 46 See Notice, supra note 3, 80 FR at 81595. FINRA Requests Comment on a Proposed Rule to Require Delivery of an Educational Communication to Customers of a Transferring Representative, Regulatory Notice 15–19, at 4 (May 2015) (‘‘Notice 15–19’’). 48 See Letter from Jeffrey T. Brown, Senior Vice President and Head of Legislative and Regulatory Affairs, Charles Schwab & Co., Inc., to Marcia E. Asquith, Senior Vice President and Corporate Secretary of FINRA, dated July 13, 2015; and letter from Joseph C. Peiffer, President, Public Investors Arbitration Bar Association, to Marcia E. Asquith, Senior Vice President and Corporate Secretary of FINRA, dated July 13, 2015. 47 See PO 00000 Frm 00093 Fmt 4703 Sfmt 4703 17517 determination to transfer assets prior to receiving the communication.49 In its response to commenters, FINRA states that it agrees with the commenters that providing the communication at the time of account opening would be less effective than the proposed approach as customers have already made the decision to transfer assets at the time the customer has initiated the account opening process. Similarly, FINRA states that it believes a requirement to permit delivery of the educational communication at any time prior to account opening would allow members to wait until the customer agrees to transfer assets to the member or until shortly before the account is opened before delivering the educational communication. Finally, with respect to one comment that post-use review of communications cannot prevent a violation of the requirement that the educational communication accompany written first individualized contact,50 FINRA notes in its response to commenters that its rules provide members’ some flexibility with respect to review of representatives’ communications with customers and require review of only some communications prior to first use or distribution.51 Consistent with those rules, FINRA states that a member would not necessarily need to implement prior use approval of every written communication to a former customer to have policies and procedures reasonably designed to achieve compliance with the proposed rule change. Duration of Delivery Requirement Under the proposed rule change, the delivery of the educational communication would apply for three months following the date the representative begins employment or associates with the member. One commenter supported shortening the applicable time period from six months as proposed in Notice 15–19 52 to three 49 See Letter from Jesse Hill, Principal— Government and Regulatory Relations, Edward Jones, to Marcia E. Asquith, Senior Vice President and Corporate Secretary of FINRA, dated July 14, 2015. 50 Commonwealth. 51 FINRA states, for example, that correspondence with customers is subject to the supervision and review requirements of FINRA Rules 3110(b) and 3110.06 through .09. While review of all institutional communications is not required prior to first use or distribution, FINRA states that FINRA Rule 2210(b)(1)(A) requires that an appropriately qualified registered principal of the member must approve each retail communication before the earlier of its use or filing with FINRA’s Advertising Regulation Department. 52 See Notice 15–19, supra note 47, at 4. E:\FR\FM\29MRN1.SGM 29MRN1 17518 Federal Register / Vol. 81, No. 60 / Tuesday, March 29, 2016 / Notices months as proposed in the Notice.53 On the other hand, two commenters supported extending the period to one year.54 In its response to commenters, FINRA states that it believes the three-month period strikes an appropriate balance between achieving the regulatory objective of an informed decision by former customers most likely to consider transferring assets as the result of their representative’s move to a new firm, while lessening the economic impacts on members. mstockstill on DSK4VPTVN1PROD with NOTICES Efforts by Current Firm To Retain Customers One commenter favored requiring a customer’s current firm to deliver the educational communication to the customer and including questions in the communication that a customer may wish to consider if the current firm is soliciting a customer to keep his or her account with the firm.55 Another commenter also supported including specific disclosure about the incentives that employees of the current firm may receive for retaining the customer.56 FINRA’s response to commenters states that, as noted in the Notice, 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 some potential conflicts (e.g., financial incentives to attract new assets) are more pronounced.57 In its response to commenters, FINRA states that while the proposed rule change would not require the current firm to provide the educational communication to a customer, the proposed educational communication does note that ‘‘some firms pay financial incentives to retain brokers or customers.’’ FINRA further states that it believes that the communication will prompt customers to consider the implications of both staying and moving when urged to do so by representatives of either firm. 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 Three commenters suggested including a statement in the educational communication that the communication is not intended as a solicitation or to encourage or discourage the transfer of customer assets.58 Two commenters asked FINRA to amend the proposed rule to include a provision stating that compliance with the rule is not intended to interfere with members’ obligations under Regulation S–P, the Protocol or other contractual nonsolicitation obligations.59 In its response to commenters, and as noted in the Notice in response to earlier comments of the same nature, FINRA states that it does not intend the proposed rule 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.60 FINRA notes that 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. Furthermore, in its response to commenters, FINRA states that it 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. FINRA does not believe it necessary or appropriate to include any statement regarding solicitation in the educational communication, which by itself and its own terms cannot reasonably be considered to encourage or discourage the transfer of assets. One commenter stated that an exception from Regulation S–P was needed to permit transferring representatives to take limited customer information with them to their new firms in order to comply with the requirements of the proposed rule.61 In its response to commenters, FINRA disagrees. FINRA states that the proposed rule does not require contact with any former customers, but rather, only requires delivering the educational communication once a transferring representative or the recruiting firm makes individualized contact with a former customer about transferring assets to an account assigned to the representative at the member. FINRA states that it believes that in most instances, a former customer will not be contacted in the first instance unless the representative or recruiting firm already has the customer’s contact information. In those rare circumstances where individualized contact that triggers the requirements of the rule happens by chance or without contact information, FINRA believes the representative or recruiting firm can ask the customer for the contact information needed to deliver the educational communication. Scope of Proposal Customers Two commenters supported expanding the requirement to apply to all customers of a representative, not just a representative’s former customers.62 One commenter recommended that the proposed rule incorporate the definition of institutional account in FINRA Rule 4512(c) (Customer Account Information) without excluding accounts held by any natural person.63 In its response to commenters, FINRA declines to revise the definition of ‘‘former customer’’ or to extend the requirement to apply to other customers of a representative. Furthermore, FINRA’s response to commenters notes that, as stated in the Notice, 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.64 In its response to commenters, FINRA states that it believes that it is appropriate to include natural persons who would be considered institutional accounts under Rule 4512(c), as these individuals may not be aware of the implications of transferring assets. Two commenters supported requiring customer affirmation of the receipt of the educational communication.65 FINRA’s response to commenters explains that, as noted in more detail in the Notice, while some firms may elect to include a customer affirmation requirement as part of their supervisory controls in implementing the proposed rule change, FINRA believes the requirements of the rule will ensure that 53 SIFMA. 54 PIABA and GSU. 58 SIFMA, 56 PIABA. 57 See Notice, supra note 3, 80 FR at 81598. VerDate Sep<11>2014 19:43 Mar 28, 2016 Jkt 238001 62 PIABA 59 RJA 55 Lincoln. 63 SIFMA. HD Vest, and LPL. and RJFS. 60 See Notice, supra note 3, 80 FR at 81599. 61 HD Vest. PO 00000 Frm 00094 Fmt 4703 Sfmt 4703 64 See and GSU. Notice, supra note 3, 80 FR at 81600. and GSU. 65 PIABA E:\FR\FM\29MRN1.SGM 29MRN1 Federal Register / Vol. 81, No. 60 / Tuesday, March 29, 2016 / Notices 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.66 In addition, FINRA states that it does not want to impose any additional obligations that may impede the timely transfer of customer assets between members. mstockstill on DSK4VPTVN1PROD with NOTICES Members and Registered Representatives One commenter requested clarification regarding whether the proposed rule would apply to representatives who are employed by or associated with a member in a nonfinancial advisor role (e.g., operations or non-producing branch/complex managers), but who may have customer accounts assigned to them that are incidental to their primary job function.67 FINRA states in its response to commenters that to the extent a representative has accounts assigned to him or her at the new firm, FINRA sees no reason to distinguish those accounts based on the representative’s primary function, as the implications for the former customers are the same. Accordingly, FINRA believes that because an account assigned to a representative may be incidental to a representative’s primary job function should not obviate the requirements of the proposed rule. Two commenters requested clarification on whether the proposed rule would apply when a representative transfers between broker-dealer subsidiaries of the same holding company.68 In its response to commenters, FINRA states that it believes that the facts and circumstances of such representative transfers may vary. FINRA will consider giving additional guidance, as appropriate, where specific questions arise regarding representative transfers between broker-dealer subsidiaries of the same holding company. In the Notice, FINRA interpreted the proposed rule change as not applying to circumstances where a customer’s account is proposed to be transferred to a new member via bulk transfer or due to a change of broker-dealer of record.69 Four commenters supported the clarification provided in the Notice in these contexts.70 One commenter stated that the interpretation that the proposed 66 See Notice, supra note 3, 80 FR at 81597. 67 SIFMA. 68 RJA and RJFS. 69 See Notice, supra note 3, 80 FR at 81596. 70 SIFMA, FSI, Committee of Annuity Insurers, and LPL. VerDate Sep<11>2014 19:43 Mar 28, 2016 Jkt 238001 rule would not apply should be extended to include all changes in networking arrangements between a financial institution and a broker-dealer, and not just those for which bulk transfers are used.71 In its response to commenters, FINRA states that it believes that 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. Because the facts and circumstances of changes in networking arrangements between a financial institution and a broker-dealer outside the bulk transfer context may vary, FINRA will consider giving additional guidance, as appropriate, where specific questions arise for changes in networking arrangements outside the bulk transfer context. In the Notice, FINRA stated that the proposed rule change would apply to a registered person dually registered as an investment adviser and broker-dealer at the former firm who associates with a member firm in both an investment advisory and broker-dealer capacity.72 One commenter supported the clarification provided in the Notice regarding the treatment of dual hatted persons.73 Another commenter noted that there may be instances where dually registered representatives have former clients with only investment advisory accounts at the former firm and requested clarification on whether the proposed rule would apply to such former customers.74 In its response to commenters, FINRA notes that it proposed to define ‘‘former customer’’ to include any customer that had a securities account assigned to a representative at the representative’s previous firm, excluding a customer account that meets the definition of an institutional account pursuant to Rule 4512(c) other than accounts held by any natural person. FINRA would interpret this definition to include an individual who had only an investment advisory account at the representative’s old firm. FINRA notes that the proposed rule 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. 71 LPL. 72 See Notice, supra note 3, 80 FR at 81601. 73 SIFMA. 74 LPL. PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 17519 Terminology Two commenters supported replacing the term ‘‘broker’’ in the educational communication with the term ‘‘registered representative.’’ 75 In its response to commenters, FINRA declines to make the requested change as it 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. Implementation Date One commenter requested that the implementation date of the proposed rule be at least 180 days from the date that the proposed rule is finalized so as to provide members with sufficient time to design, adopt, and implement appropriate policies and procedures to achieve compliance with the rule.76 In its response to commenters, FINRA states that it will consider the need to develop compliance systems and make operational changes in establishing an effective date for the proposed rule. IV. Discussion and Commission Findings After carefully considering the proposal, the comments submitted, and FINRA’s response to the comments, the Commission finds that the proposed rule change is consistent with the requirements of the Exchange Act and rules and regulations thereunder applicable to a national securities association.77 In particular, the Commission finds that the proposed rule change is consistent with Exchange Act section 15A(b)(6),78 which requires, among other things, that the rules of a national securities association be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. The Commission believes that the proposed rule change would increase the information available to investors 75 RJFS, RJFA. 76 SIFMA. 77 In approving the proposed rule change, the Commission has considered the impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 78 15 U.S.C. 78o–3(b)(6). E:\FR\FM\29MRN1.SGM 29MRN1 17520 Federal Register / Vol. 81, No. 60 / Tuesday, March 29, 2016 / Notices regarding the potential implications of transferring assets. The Commission further believes that the proposed educational communication may encourage former customers to make inquiries of their representatives, which could increase communication between customers and representatives about the potential implications of transferring assets. The Commission believes that the increase in information and communication about the potential implications of transferring assets will benefit customers when deciding whether to transfer assets. The Commission does not believe that the proposed rule change will result in a burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. The Commission believes FINRA has carefully crafted the proposed rule change to achieve its intended and necessary regulatory purpose while minimizing the burden on firms. Although the proposed rule change will impose new requirements upon FINRA members, it will apply equally to all FINRA members when hiring or otherwise associating with a registered representative. The Commission has considered the commenters’ views on the proposed rule change and believes that FINRA responded appropriately to the concerns raised. For the reasons stated above, the Commission finds that the rule change is consistent with the Act and the rules and regulations thereunder. V. Conclusion IT IS THEREFORE ORDERED, pursuant to Exchange Act section 19(b)(2) 79 that the proposed rule change (SR–FINRA–2015–057) be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.80 Brent J. Fields, Secretary. [FR Doc. 2016–06995 Filed 3–28–16; 8:45 am] mstockstill on DSK4VPTVN1PROD with NOTICES BILLING CODE 8011–01–P 79 15 80 17 U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). VerDate Sep<11>2014 19:43 Mar 28, 2016 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–77433; File No. SR– NYSEMKT–2016–38] Self-Regulatory Organizations; NYSE MKT LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending Rule 13— Equities To Expand the Availability of Self-Trade Prevention Modifiers to Non-Algorithmically Entered Floor Broker Interest March 23, 2016. 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 March 15, 2016, NYSE MKT LLC (the ‘‘Exchange’’ or ‘‘NYSE MKT’’) 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 prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Rule 13—Equities to expand the availability of self-trade prevention (‘‘STP’’) modifiers to nonalgorithmically entered Floor broker interest. The proposed rule change is available on the Exchange’s Web site at www.nyse.com, at the principal office of the Exchange, 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, the self-regulatory organization 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 those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. 1 15 2 17 Jkt 238001 PO 00000 U.S.C. 78s(b)(1). CFR 240.19b–4. Frm 00096 Fmt 4703 Sfmt 4703 A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to amend Rule 13—Equities (‘‘Rule 13’’) to expand the availability of STP modifiers to nonalgorithmically entered e-Quotes, pegging e-Quotes, and g-Quotes. STP modifiers arEe [sic] designed to prevent two orders from the same market participant identifier (‘‘MPID’’) assigned to a member organization from executing against each other. The STP modifier on the incoming order determines the interaction between two orders marked with STP modifiers and whether the incoming or the resting order would cancel. Both the buy and the sell order must include an STP modifier in order to prevent a trade from occurring and to effect a cancel instruction.3 Currently, under Rule 13(f)(3)(B), STP modifiers are available for Limit Orders and Market Orders entered by off-Floor participants, and for e-Quotes, pegging e-Quotes, and gQuotes sent to the matching engine by an algorithm on behalf of a Floor broker. The Exchange amended Rule 13 to add STP modifiers in 2013.4 At the time, the supporting technology was not compatible with Floor broker systems and the Exchange chose to deploy STP modifiers for other market participants while it performed the technical modifications required for the use of STP modifiers for Floor brokers.5 The Exchange later made STP modifiers available for algorithms used by Floor brokers to route interest to the Exchange’s matching engine, but the technology supporting STP modifiers was still incompatible with all Floor broker systems.6 Now that the technology to extend STP modifiers to all Floor broker systems is available, the Exchange proposes to delete the clause ‘‘sent to the matching engine by an algorithm on behalf of a Floor broker’’ in Rule 13 to make STP modifiers available for eQuotes, pegging e-Quotes, and g-Quotes without limitation. No other changes are proposed to Rule 13. Because of the technology changes associated with this rule proposal, the Exchange will announce the 3 See Rule 13(f)(3)(A); Securities Exchange Act Release No. 69098 (Mar. 11, 2013), 78 FR 16544 (Mar. 15, 2013) (SR–NYSEMKT–2013–21). 4 See Securities Exchange Act Release No. 69098, 78 FR at 16544. 5 See id. 6 See Securities Exchange Act Release No. 69501 (May 2, 2013), 78 FR 26821 (May 8, 2013) (SR– NYSEMKT–2013–36). E:\FR\FM\29MRN1.SGM 29MRN1

Agencies

[Federal Register Volume 81, Number 60 (Tuesday, March 29, 2016)]
[Notices]
[Pages 17513-17520]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-06995]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77430; File No. SR-FINRA-2015-057]


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

March 23, 2016.

I. Introduction

    On December 16, 2015, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on December 30, 2015.\3\ The Commission received twelve 
comment letters on the proposal.\4\ On February 4, 2016, FINRA extended 
the time period for Commission action on the proposed rule change until 
March 29, 2016. On March 17, 2016, FINRA responded to

[[Page 17514]]

the comments.\5\ The proposed rule change is unchanged from the 
original proposal. This order approves the proposed rule change. The 
text of the proposed rule change is available on FINRA's Web site at 
http://www.finra.org, at the principal office of FINRA, on the 
Commission's Web site at http://www.sec.gov, and at the Commission's 
Public Reference Room.
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    \3\ See Notice of Filing of a Proposed Rule Change to Adopt 
FINRA Rule 2273 (Educational Communication Related to Recruitment 
Practices and Account Transfers), Exchange Act Rel. No. 76757 
(December 23, 2015), 80 FR 81590 (December 30, 2015) (``Notice'').
    \4\ Comment letters were submitted by Georgia State University 
College of Law Investor Advocacy Clinic (``GSU''); Commonwealth 
Financial Network (``Commonwealth''); Securities Industry and 
Financial Markets Association (``SIFMA''); Financial Services 
Institute (``FSI''); Public Investors Arbitration Bar Association 
(``PIABA''); Wells Fargo Advisors (``Wells Fargo''); The Committee 
of Annuity Insurers (``Committee of Annuity Insurers''); Lincoln 
Financial Network (``Lincoln''); LPL Financial (``LPL''); Raymond 
James Financial Services (``RJFS''); Raymond James & Associates 
(``RJA''); and HD Vest Investment Services (``HD Vest'').
    \5\ Letter from Jeanette Wingler, Assistant General Counsel, 
FINRA, to Brent J. Fields, Secretary, Commission, dated March 17, 
2016.
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II. Description of the Proposed Rule Change

Background

    FINRA is concerned that representatives who switch their member 
firm often contact former customers and emphasize the benefits the 
former customers would experience by following the representative and 
transferring their assets to the firm that recruited the registered 
representative (``recruiting firm'') and maintaining their relationship 
with the representative. In this situation, former customers' 
confidence in and prior experience with the representative may be one 
of the customers' most important considerations in determining whether 
to transfer assets to the recruiting firm. As stated in the Notice, 
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 direct 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.
    As stated in the Notice, 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.

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.\6\
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    \6\ 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.\7\
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    \7\ 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 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 recruiting firm (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

    As stated in the Notice, 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.\8\ 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''); \9\ (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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    \8\ See Notice, supra note 3, 80 FR at 81591.
    \9\ 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, as stated in the Notice, 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.\10\ 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.
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    \10\ See Notice, supra note 3, 80 FR at 81591.
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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 the first individualized 
contact with a former customer by the member,

[[Page 17515]]

directly or through the representative, regarding the former customer 
transferring assets to the member.\11\ 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.\12\
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    \11\ See proposed FINRA Rule 2273(b)(1).
    \12\ 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.\13\
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    \13\ 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.\14\ 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.\15\
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    \14\ See proposed FINRA Rule 2273(b)(2).
    \15\ 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.\16\
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    \16\ 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.\17\ The proposed rule change would require members to provide the 
FINRA-created communication and would not permit members to use an 
alternative format.\18\ As stated in the Notice, 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.\19\
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    \17\ See proposed FINRA Rule 2273(a) and Exhibit 3.
    \18\ See proposed FINRA Rule 2273(a).
    \19\ See Notice, supra note 3, 80 FR at 81592.
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III. Summary of Comment Letters and FINRA's Response

Overall Proposal

    Two commenters stated that the current proposal is an improvement 
from the previous version of the proposal.\20\ Eight additional 
commenters expressed support for a regulatory effort to provide 
investors with meaningful information upon which to base a decision to 
transfer assets but did not support all aspects of the current 
proposal.\21\ Two commenters opposed the current proposal and instead 
supported a return to the requirement in a previous version of the 
proposal to provide specific information about any financial incentives 
received by the representative and costs associated with the former 
customer transferring assets.\22\ Alternatively, another commenter 
suggested requiring the member to provide written answers to the 
questions included in the educational communication if the customer so 
requests.\23\ One commenter maintained that the proposal is not 
justified by its costs because there are no systemic issues with the 
current account transfer process, which also includes some 
disclosure.\24\
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    \20\ Lincoln and FSI.
    \21\ SIFMA, LPL, Wells Fargo, RJFS, RJFA, Commonwealth, and HD 
Vest.
    \22\ PIABA and GSU.
    \23\ GSU.
    \24\ HD Vest.
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    In its response to commenters, FINRA states that it believes that 
the proposal 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. Furthermore, FINRA's 
response to commenters notes that, as explained in more detail in the 
Notice, FINRA considered several alternatives to the proposal to help 
ensure that it is narrowly tailored to achieve its purposes without 
imposing unnecessary costs and burdens on members.\25\ FINRA believes 
that the proposed rule is an effective and efficient alternative to the 
previous proposal. While educating former customers about important 
considerations to make an informed decision whether to transfer assets 
to the recruiting firm, FINRA believes the proposed rule eliminates or 
reduces the privacy and operational concerns raised regarding the 
previous proposal (e.g., by removing the requirement to disclose to 
former customers the magnitude of recruitment compensation paid to a 
transferring representative). FINRA notes that the dialogue prompted by 
the educational communication could include a discussion with the 
transferring representative about more specifics related to the 
incentives and costs associated with the transfer.
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    \25\ See Notice, supra note 3, 80 FR at 81593.
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    FINRA further states in its response to commenters that it believes 
that former customers would benefit from receiving a concise, plain-
English document that highlights the potential implications of 
transferring assets, such as conflict and cost considerations, several 
of which are not disclosed or otherwise brought to the attention of a 
customer as part of the account transfer approval documentation.

Requirement To Deliver the Educational Communication

    One commenter supported the proposal's delivery requirements as 
providing a ``clear and straightforward standard.'' \26\ The commenter 
further stated that with the ``straightforward standard, firms will be 
able to easily create and implement policies, procedures and systems to 
comply with the rule.'' \27\ Some commenters, on the other hand, stated 
that the triggers for delivering the educational

[[Page 17516]]

communication would be complex and difficult for members to implement 
as members would be dependent on reporting by representatives to 
members with respect to each individualized contact with a former 
customer.\28\ Some commenters commented that compliance with the 
proposed rule would require significant time and effort on the part of 
members and would result in significant costs.\29\
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    \26\ FSI.
    \27\ FSI.
    \28\ Commonwealth and HD Vest.
    \29\ Commonwealth and HD Vest.
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    In its response to commenters, FINRA states that it does not 
believe that the 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. Moreover, FINRA's response to commenters notes that, as 
FINRA stated in the Notice, members already are obligated to supervise 
representatives' communications with existing or prospective customers 
and have flexibility to design their supervisory systems to track 
communications soliciting new business from former customers of 
representatives.\30\ As such, FINRA does not believe the proposed rule 
change imposes substantially new or burdensome obligations by requiring 
firms to establish policies and procedures reasonably designed to 
ensure that the educational communication is timely delivered to former 
customers.
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    \30\ See Notice, supra note 3, 80 FR at 81595.
---------------------------------------------------------------------------

    One commenter stated that a member cannot supervise communications 
between representatives and former customers before such customers 
establish accounts at the member.\31\ In its response to commenters, 
FINRA states that it disagrees. If a representative is associated with 
or employed by a member, FINRA notes that the member is required to 
supervise the representative's conduct consistent with FINRA rules, 
including FINRA Rule 2210 (Communications with the Public). FINRA notes 
that the standards applicable to retail communications and 
correspondence under Rule 2210, as well as the requirements to 
supervise correspondence pursuant to FINRA Rule 3110 (Supervision), are 
not limited to communications with current customers. FINRA states that 
therefore, the fact that a former customer or any other individual has 
not yet established an account at the member does not obviate those 
supervision requirements.
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    \31\ HD Vest.
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 Individualized Contact

    Some commenters requested additional guidance as to what 
individualized contact with a former customer would trigger the 
requirement to deliver the educational communication.\32\ FINRA's 
response to commenters notes that, as stated in the Notice, it intends 
for a broad range of oral or written communications by a recruiting 
firm, directly or through a representative, to constitute 
individualized contact with a former customer to transfer assets and 
therefore trigger the delivery of the educational communication under 
the proposed rule.\33\ FINRA notes that the Notice provides several 
examples of such individualized contacts, including a written or oral 
communication informing the customer that the representative is now 
associated with the recruiting firm.\34\ In its response to commenters, 
FINRA states that it will consider giving additional guidance, as 
appropriate, where questions about specific types of individualized 
contact arise.
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    \32\ SIFMA, HD Vest, RJA, and RJFS.
    \33\ See Notice, supra note 3, 80 FR at 81591.
    \34\ See Notice, supra note 3, 80 FR at 81591.
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    The proposed rule change would require delivery of the educational 
communication, absent individualized contact, with account transfer 
approval documentation. One commenter supported requiring delivery of 
the educational communication to a former customer, where there is not 
individualized contact, before the transmittal of the account transfer 
approval documentation.\35\ FINRA's response to commenters notes that 
to lessen any associated operational and supervisory burdens of 
implementing the proposed rule, FINRA has not proposed requiring that 
the educational communication be provided to former customers before 
the account transfer approval documentation where there is not 
individualized contact.
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    \35\ GSU.
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    One commenter expressed the view that the different delivery 
requirements based on whether there was individualized contact would be 
unworkable as members could not reasonably determine that the receipt 
of account paperwork was the result of no contact between the 
registered person and the former customer.\36\
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    \36\ Commonwealth.
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    FINRA's response to commenters states that, as set forth in the 
Notice, 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.\37\ FINRA also states in its response to 
commenters that it believes that a reasonably designed supervisory 
system would require the representative to communicate with a member 
whether he or she had individualized contact with a former customer. As 
such, FINRA does not believe it is unworkable to distinguish account 
transfers that resulted absent individualized contact.
---------------------------------------------------------------------------

    \37\ See Notice, supra note 3, 80 FR at 81594.
---------------------------------------------------------------------------

    Some commenters requested clarification regarding whether the 
requirements of the proposed rule would be triggered by ``unanticipated 
communications'' between a representative and a former customer.\38\ In 
its response to commenters, FINRA explains that the proposed rule would 
apply where a member, directly or through a representative, 
individually contacts a former customer of that representative to 
transfer assets or where a former customer transfers assets to an 
account assigned to the representative at the member absent 
individualized contact. As such, FINRA notes that whether contact that 
occurs with a former customer is planned or serendipitous is not 
dispositive; rather, it is the substance of the communication that 
determines if the delivery requirement is triggered. Thus, FINRA 
explains that unanticipated contact with a former customer (e.g., at a 
sporting or social event) without a communication from the 
representative to the former customer that would constitute 
individualized contact, as described above, about transferring assets 
would not trigger the requirements of the proposed rule. In its 
response to commenters FINRA notes that, if, for example, the 
representative took the opportunity of the situation to inform the 
former customer of his or her move to a new firm and the merits of 
transferring assets to that new firm, the delivery requirement would be 
triggered.
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    \38\ Lincoln, LPL, RJA, and RJFS.
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Timing and Delivery of Educational Communication
    Several commenters expressed concern with the means and timing of 
the delivery requirement. Some commenters contended that the 
requirement to deliver the educational communication within three 
business days after oral contact by a representative with a former 
customer would present operational and supervisory challenges, such as 
training

[[Page 17517]]

representatives on the scope and practical implications of the 
requirement, relying on representatives to timely report contacts to 
the member, and preparing the mailing to former customers within the 
required period of time.\39\ One commenter suggested eliminating the 
requirement to deliver the educational communication within three 
business days after oral contact and instead require written delivery 
in all circumstances.\40\ Along with that commenter, some commenters 
suggested that the requirement to deliver the educational communication 
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.\41\ Alternatively, one commenter suggested 
lengthening the period to deliver the educational communication to 10 
business days.\42\
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    \39\ SIFMA, Committee of Annuity Insurers, Lincoln, RJA, RJFS, 
Commonwealth, and HD Vest.
    \40\ Wells Fargo.
    \41\ Wells Fargo, SIFMA, Lincoln, Committee of Annuity Insurers, 
RJA, RJFS, Commonwealth, and HD Vest.
    \42\ HD Vest.
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    One commenter requested additional analysis and justification for 
FINRA's belief that delivering the communication at or prior to account 
opening would be too late because customers typically have already made 
the decision to transfer assets by that point in the process.\43\ 
Another commenter stated that requiring the educational communication 
to accompany the first written communication would mean that any 
efforts taken by a member to review written communications that have 
already occurred between a representative and a former customer would 
be too late to prevent a rule violation.\44\
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    \43\ SIFMA.
    \44\ Commonwealth.
---------------------------------------------------------------------------

    FINRA's response to commenters notes that with respect to delivery 
after oral contact, as stated in the Notice, FINRA believes that the 
three-business-day period gives a representative sufficient time to 
inform 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.\45\ Furthermore, as stated in 
its response to commenters, FINRA understands that members frequently 
send account opening documentation within that time frame to customers 
that have indicated an interest in opening an account. FINRA also notes 
that it sought data and evidence around the associated costs of the 
proposed rule and that commenters did not provide specific data or 
analysis to support their contention that the delivery requirements as 
proposed would present considerable additional costs for recruiting 
firms. Accordingly, FINRA does not propose to change the requirement in 
the proposed rule.
---------------------------------------------------------------------------

    \45\ See Notice, supra note 3, 80 FR at 81595-81596.
---------------------------------------------------------------------------

    As explained in its response to commenters and in more detail in 
the Notice, FINRA believes that to be effective, the proposed 
educational communication must 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.\46\ In its response to 
commenters, FINRA notes that the delivery requirement will allow the 
customer the time needed to have discussions with the registered 
representative and the customer's current firm about the implications 
of transferring assets in close proximity to receipt of any information 
the representative may have provided to encourage a transfer and will 
facilitate an informed and reasoned decision. FINRA further notes that 
some commenters to its Regulatory Notice 15-19,\47\ where FINRA first 
proposed the delivery requirements, noted the benefits of timely 
delivery. FINRA points out that two commenters to Regulatory Notice 15-
19 supported requiring 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.\48\ 
FINRA also notes that another broker-dealer commenter that favored 
contemporaneous delivery of the educational communication at the time 
of first individualized contact stated that permitting three business 
days following an oral communication was too late as many customers 
will make a determination to transfer assets prior to receiving the 
communication.\49\
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    \46\ See Notice, supra note 3, 80 FR at 81595.
    \47\ See FINRA Requests Comment on a Proposed Rule to Require 
Delivery of an Educational Communication to Customers of a 
Transferring Representative, Regulatory Notice 15-19, at 4 (May 
2015) (``Notice 15-19'').
    \48\ See Letter from Jeffrey T. Brown, Senior Vice President and 
Head of Legislative and Regulatory Affairs, Charles Schwab & Co., 
Inc., to Marcia E. Asquith, Senior Vice President and Corporate 
Secretary of FINRA, dated July 13, 2015; and letter from Joseph C. 
Peiffer, President, Public Investors Arbitration Bar Association, to 
Marcia E. Asquith, Senior Vice President and Corporate Secretary of 
FINRA, dated July 13, 2015.
    \49\ See Letter from Jesse Hill, Principal--Government and 
Regulatory Relations, Edward Jones, to Marcia E. Asquith, Senior 
Vice President and Corporate Secretary of FINRA, dated July 14, 
2015.
---------------------------------------------------------------------------

    In its response to commenters, FINRA states that it agrees with the 
commenters that providing the communication at the time of account 
opening would be less effective than the proposed approach as customers 
have already made the decision to transfer assets at the time the 
customer has initiated the account opening process. Similarly, FINRA 
states that it believes a requirement to permit delivery of the 
educational communication at any time prior to account opening would 
allow members to wait until the customer agrees to transfer assets to 
the member or until shortly before the account is opened before 
delivering the educational communication.
    Finally, with respect to one comment that post-use review of 
communications cannot prevent a violation of the requirement that the 
educational communication accompany written first individualized 
contact,\50\ FINRA notes in its response to commenters that its rules 
provide members' some flexibility with respect to review of 
representatives' communications with customers and require review of 
only some communications prior to first use or distribution.\51\ 
Consistent with those rules, FINRA states that a member would not 
necessarily need to implement prior use approval of every written 
communication to a former customer to have policies and procedures 
reasonably designed to achieve compliance with the proposed rule 
change.
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    \50\ Commonwealth.
    \51\ FINRA states, for example, that correspondence with 
customers is subject to the supervision and review requirements of 
FINRA Rules 3110(b) and 3110.06 through .09. While review of all 
institutional communications is not required prior to first use or 
distribution, FINRA states that FINRA Rule 2210(b)(1)(A) requires 
that an appropriately qualified registered principal of the member 
must approve each retail communication before the earlier of its use 
or filing with FINRA's Advertising Regulation Department.
---------------------------------------------------------------------------

Duration of Delivery Requirement

    Under the proposed rule change, the delivery of the educational 
communication would apply for three months following the date the 
representative begins employment or associates with the member. One 
commenter supported shortening the applicable time period from six 
months as proposed in Notice 15-19 \52\ to three

[[Page 17518]]

months as proposed in the Notice.\53\ On the other hand, two commenters 
supported extending the period to one year.\54\
---------------------------------------------------------------------------

    \52\ See Notice 15-19, supra note 47, at 4.
    \53\ SIFMA.
    \54\ PIABA and GSU.
---------------------------------------------------------------------------

    In its response to commenters, FINRA states that it believes the 
three-month period strikes an appropriate balance between achieving the 
regulatory objective of an informed decision by former customers most 
likely to consider transferring assets as the result of their 
representative's move to a new firm, while lessening the economic 
impacts on members.

Efforts by Current Firm To Retain Customers

    One commenter favored requiring a customer's current firm to 
deliver the educational communication to the customer and including 
questions in the communication that a customer may wish to consider if 
the current firm is soliciting a customer to keep his or her account 
with the firm.\55\ Another commenter also supported including specific 
disclosure about the incentives that employees of the current firm may 
receive for retaining the customer.\56\
---------------------------------------------------------------------------

    \55\ Lincoln.
    \56\ PIABA.
---------------------------------------------------------------------------

    FINRA's response to commenters states that, as noted in the Notice, 
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 some potential conflicts (e.g., financial incentives to 
attract new assets) are more pronounced.\57\ In its response to 
commenters, FINRA states that while the proposed rule change would not 
require the current firm to provide the educational communication to a 
customer, the proposed educational communication does note that ``some 
firms pay financial incentives to retain brokers or customers.'' FINRA 
further states that it believes that the communication will prompt 
customers to consider the implications of both staying and moving when 
urged to do so by representatives of either firm. 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.
---------------------------------------------------------------------------

    \57\ See Notice, supra note 3, 80 FR at 81598.
---------------------------------------------------------------------------

Contractual and Legal Considerations

    Three commenters suggested including a statement in the educational 
communication that the communication is not intended as a solicitation 
or to encourage or discourage the transfer of customer assets.\58\ Two 
commenters asked FINRA to amend the proposed rule to include a 
provision stating that compliance with the rule is not intended to 
interfere with members' obligations under Regulation S-P, the Protocol 
or other contractual non-solicitation obligations.\59\
---------------------------------------------------------------------------

    \58\ SIFMA, HD Vest, and LPL.
    \59\ RJA and RJFS.
---------------------------------------------------------------------------

    In its response to commenters, and as noted in the Notice in 
response to earlier comments of the same nature, FINRA states that it 
does not intend the proposed rule 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.\60\ FINRA notes that 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. 
Furthermore, in its response to commenters, FINRA states that it 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. FINRA does not believe it necessary or appropriate to 
include any statement regarding solicitation in the educational 
communication, which by itself and its own terms cannot reasonably be 
considered to encourage or discourage the transfer of assets.
---------------------------------------------------------------------------

    \60\ See Notice, supra note 3, 80 FR at 81599.
---------------------------------------------------------------------------

    One commenter stated that an exception from Regulation S-P was 
needed to permit transferring representatives to take limited customer 
information with them to their new firms in order to comply with the 
requirements of the proposed rule.\61\ In its response to commenters, 
FINRA disagrees. FINRA states that the proposed rule does not require 
contact with any former customers, but rather, only requires delivering 
the educational communication once a transferring representative or the 
recruiting firm makes individualized contact with a former customer 
about transferring assets to an account assigned to the representative 
at the member. FINRA states that it believes that in most instances, a 
former customer will not be contacted in the first instance unless the 
representative or recruiting firm already has the customer's contact 
information. In those rare circumstances where individualized contact 
that triggers the requirements of the rule happens by chance or without 
contact information, FINRA believes the representative or recruiting 
firm can ask the customer for the contact information needed to deliver 
the educational communication.
---------------------------------------------------------------------------

    \61\ HD Vest.
---------------------------------------------------------------------------

Scope of Proposal

Customers
    Two commenters supported expanding the requirement to apply to all 
customers of a representative, not just a representative's former 
customers.\62\ One commenter recommended that the proposed rule 
incorporate the definition of institutional account in FINRA Rule 
4512(c) (Customer Account Information) without excluding accounts held 
by any natural person.\63\
---------------------------------------------------------------------------

    \62\ PIABA and GSU.
    \63\ SIFMA.
---------------------------------------------------------------------------

    In its response to commenters, FINRA declines to revise the 
definition of ``former customer'' or to extend the requirement to apply 
to other customers of a representative. Furthermore, FINRA's response 
to commenters notes that, as stated in the Notice, 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.\64\ In its response to commenters, FINRA states that 
it believes that it is appropriate to include natural persons who would 
be considered institutional accounts under Rule 4512(c), as these 
individuals may not be aware of the implications of transferring 
assets.
---------------------------------------------------------------------------

    \64\ See Notice, supra note 3, 80 FR at 81600.
---------------------------------------------------------------------------

    Two commenters supported requiring customer affirmation of the 
receipt of the educational communication.\65\ FINRA's response to 
commenters explains that, as noted in more detail in the Notice, while 
some firms may elect to include a customer affirmation requirement as 
part of their supervisory controls in implementing the proposed rule 
change, FINRA believes the requirements of the rule will ensure that

[[Page 17519]]

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.\66\ In addition, FINRA 
states that it does not want to impose any additional obligations that 
may impede the timely transfer of customer assets between members.
---------------------------------------------------------------------------

    \65\ PIABA and GSU.
    \66\ See Notice, supra note 3, 80 FR at 81597.
---------------------------------------------------------------------------

Members and Registered Representatives
    One commenter requested clarification regarding whether the 
proposed rule would apply to representatives who are employed by or 
associated with a member in a non-financial advisor role (e.g., 
operations or non-producing branch/complex managers), but who may have 
customer accounts assigned to them that are incidental to their primary 
job function.\67\ FINRA states in its response to commenters that to 
the extent a representative has accounts assigned to him or her at the 
new firm, FINRA sees no reason to distinguish those accounts based on 
the representative's primary function, as the implications for the 
former customers are the same. Accordingly, FINRA believes that because 
an account assigned to a representative may be incidental to a 
representative's primary job function should not obviate the 
requirements of the proposed rule.
---------------------------------------------------------------------------

    \67\ SIFMA.
---------------------------------------------------------------------------

    Two commenters requested clarification on whether the proposed rule 
would apply when a representative transfers between broker-dealer 
subsidiaries of the same holding company.\68\ In its response to 
commenters, FINRA states that it believes that the facts and 
circumstances of such representative transfers may vary. FINRA will 
consider giving additional guidance, as appropriate, where specific 
questions arise regarding representative transfers between broker-
dealer subsidiaries of the same holding company.
---------------------------------------------------------------------------

    \68\ RJA and RJFS.
---------------------------------------------------------------------------

    In the Notice, FINRA interpreted the proposed rule change as not 
applying to circumstances where a customer's account is proposed to be 
transferred to a new member via bulk transfer or due to a change of 
broker-dealer of record.\69\ Four commenters supported the 
clarification provided in the Notice in these contexts.\70\ One 
commenter stated that the interpretation that the proposed rule would 
not apply should be extended to include all changes in networking 
arrangements between a financial institution and a broker-dealer, and 
not just those for which bulk transfers are used.\71\
---------------------------------------------------------------------------

    \69\ See Notice, supra note 3, 80 FR at 81596.
    \70\ SIFMA, FSI, Committee of Annuity Insurers, and LPL.
    \71\ LPL.
---------------------------------------------------------------------------

    In its response to commenters, FINRA states that it believes that 
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. 
Because the facts and circumstances of changes in networking 
arrangements between a financial institution and a broker-dealer 
outside the bulk transfer context may vary, FINRA will consider giving 
additional guidance, as appropriate, where specific questions arise for 
changes in networking arrangements outside the bulk transfer context.
    In the Notice, FINRA stated that the proposed rule change would 
apply to a registered person dually registered as an investment adviser 
and broker-dealer at the former firm who associates with a member firm 
in both an investment advisory and broker-dealer capacity.\72\ One 
commenter supported the clarification provided in the Notice regarding 
the treatment of dual hatted persons.\73\ Another commenter noted that 
there may be instances where dually registered representatives have 
former clients with only investment advisory accounts at the former 
firm and requested clarification on whether the proposed rule would 
apply to such former customers.\74\
---------------------------------------------------------------------------

    \72\ See Notice, supra note 3, 80 FR at 81601.
    \73\ SIFMA.
    \74\ LPL.
---------------------------------------------------------------------------

    In its response to commenters, FINRA notes that it proposed to 
define ``former customer'' to include any customer that had a 
securities account assigned to a representative at the representative's 
previous firm, excluding a customer account that meets the definition 
of an institutional account pursuant to Rule 4512(c) other than 
accounts held by any natural person. FINRA would interpret this 
definition to include an individual who had only an investment advisory 
account at the representative's old firm. FINRA notes that the proposed 
rule 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.

Terminology

    Two commenters supported replacing the term ``broker'' in the 
educational communication with the term ``registered representative.'' 
\75\
---------------------------------------------------------------------------

    \75\ RJFS, RJFA.
---------------------------------------------------------------------------

    In its response to commenters, FINRA declines to make the requested 
change as it 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.

Implementation Date

    One commenter requested that the implementation date of the 
proposed rule be at least 180 days from the date that the proposed rule 
is finalized so as to provide members with sufficient time to design, 
adopt, and implement appropriate policies and procedures to achieve 
compliance with the rule.\76\
---------------------------------------------------------------------------

    \76\ SIFMA.
---------------------------------------------------------------------------

    In its response to commenters, FINRA states that it will consider 
the need to develop compliance systems and make operational changes in 
establishing an effective date for the proposed rule.

IV. Discussion and Commission Findings

    After carefully considering the proposal, the comments submitted, 
and FINRA's response to the comments, the Commission finds that the 
proposed rule change is consistent with the requirements of the 
Exchange Act and rules and regulations thereunder applicable to a 
national securities association.\77\ In particular, the Commission 
finds that the proposed rule change is consistent with Exchange Act 
section 15A(b)(6),\78\ which requires, among other things, that the 
rules of a national securities association be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in facilitating transactions in securities, to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest.
---------------------------------------------------------------------------

    \77\ In approving the proposed rule change, the Commission has 
considered the impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \78\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    The Commission believes that the proposed rule change would 
increase the information available to investors

[[Page 17520]]

regarding the potential implications of transferring assets. The 
Commission further believes that the proposed educational communication 
may encourage former customers to make inquiries of their 
representatives, which could increase communication between customers 
and representatives about the potential implications of transferring 
assets. The Commission believes that the increase in information and 
communication about the potential implications of transferring assets 
will benefit customers when deciding whether to transfer assets.
    The Commission does not believe that the proposed rule change will 
result in a burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Exchange Act. The Commission 
believes FINRA has carefully crafted the proposed rule change to 
achieve its intended and necessary regulatory purpose while minimizing 
the burden on firms. Although the proposed rule change will impose new 
requirements upon FINRA members, it will apply equally to all FINRA 
members when hiring or otherwise associating with a registered 
representative.
    The Commission has considered the commenters' views on the proposed 
rule change and believes that FINRA responded appropriately to the 
concerns raised.
    For the reasons stated above, the Commission finds that the rule 
change is consistent with the Act and the rules and regulations 
thereunder.

V. Conclusion

    IT IS THEREFORE ORDERED, pursuant to Exchange Act section 19(b)(2) 
\79\ that the proposed rule change (SR-FINRA-2015-057) be, and hereby 
is, approved.
---------------------------------------------------------------------------

    \79\ 15 U.S.C. 78s(b)(2).
    \80\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\80\
Brent J. Fields,
Secretary.
[FR Doc. 2016-06995 Filed 3-28-16; 8:45 am]
 BILLING CODE 8011-01-P