Comp Rule Puts Finra Between Broker and Client

With 2013 barely underway, Finra has wasted no time in proposing onerous new rules and regulations for member firms. One such rule was recently released for comment with Regulatory Notice 13-02, the so-called “broker compensation rule.”

Essentially the firm introduces a new requirement for registered representatives who are recruited away from one broker/dealer to another with “enhanced compensation” of $50,000 or more. In such situations, under the new rule the recruited rep would be required to disclose their “enhanced compensation” to any client they attempt to transfer over to their new firm.

On the surface the rule seems simple enough; so far as Finra rules go, it seems relatively straightforward. The problem with such a disclosure is that it is completely unnecessary. The only disclosures necessary for clients to receive are related specifically to their costs associated with given products or transactions, as laid out in the Securities Acts of 1933 and ’34.

This proposed rule has no conceivable grounds in either Act. In fact, it is no less onerous than a requirement that Finra staff members, directors or Board Members include in any letter or opinion they write a disclosure including any compensation they previously received from any registered firms who formerly employed them.

Regulatory Notice 13-02 is only the most recent example of Finra’s tendency to forget its past. Finra’s predecessor, the NASD, was created BY firms – this goes to the very nature of a Self-Regulatory Organization.

The NASD was created with the purpose of helping its member firms to comply with generally agreed-upon rules grounded in the Securities Acts of ’33 and ’34 with two objectives. First, member firms hoped to protect the investing public from impropriety. Second, the presence of an industry SRO provided financial firms with confidence that other firms within their industry were acting honorably. This is why Finra is expected to seek out fraud and shut it down.

What Finra is not expected to do is meddle unnecessarily in firm operations. Nor should Finra expect that member firms implicitly consent to over-burdensome regulations. Nor yet do we member firms appreciate Finra attempting to interject itself between representatives or firms and their clients.

Ben Treece is a partner with Treece Investment Advisory Corp ( and licensed with FINRA ( through Treece Financial Services Corp. The above information is the opinion of Ben Treece and should not be construed as investment advice or used without outside verification.
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