FINRA Rule 2273 requires broker-dealers to send "educational communication" to former customers of registered representatives
FINRA Rule 2273 requires broker-dealers to send "educational communication" to former customers of registered representatives
Effective November 11, 2016, FINRA Rule 2273 (Educational Communication Related to Recruitment Practices and Account Transfers) requires members to deliver "Educational Communication" to former customers of registered persons they hire or associate with. This rule was implemented to inform customers of costs they may incur by following their registered representative to his or her new firm.[1]
Pursuant to FINRA Rule 2273, "A member that hires or associates with a registered person shall provide to a former customer of the registered person, individually, in paper or electronic form, an educational communication prepared by FINRA when (1) the member, directly or through that registered person, individually contacts the former customer of that registered person to transfer assets or (2) the former customer of that registered person, absent individualized contact, transfers assets to an account assigned, or to be assigned, to the registered person at the member."[2]
What is it?
FINRA's new rule requiring broker-dealers to send "Educational Communication" to former clients of new recruits they hire.
who is a "former customer"?
A "former customer" includes any customer that had a securities account assigned to a registered person at the representative's previous firm. An exception exists for "institutional accounts,"[3] unless the "institutional account" is held by a natural person.
When does it apply?
Educational Communication must be sent in two main scenarios:[4]
(1) - When the firm, directly or through a representative, individually contacts a former customer of that representative to transfer assets.
(2) - When a former customer of the representative, absent individual contact, transfer assets to an account assigned, or to be assigned, to the representative of the firm.
Additionally, the following occurrences would trigger the Educational Communication requirement, including but not limited to:
- Informing the former customer that he or she is now associated with the recruiting firm
- Suggesting that the former customer consider transferring his or her assets or account to the recruiting firm
- Informing the former customer that the recruiting firm may offer better or different products or services
- Discussing with the former customer the fee or pricing structure of the recruiting firm.
- Oral or written communications to a group of former customers including (but not limited to): mass mailings of information, sending copies of information via email, or automated phone calls or voicemails.[5]
timing & method of delivery
A firm is required to deliver Educational Communication at the time of first individualized contact with a former customer by the firm, directly or through the representative, regarding the former customer transferring assets to the firm. The delivery shall apply for a period of three months following the date the registered person begins employment or associates with the member.
If such contact is in writing[6] the Educational Communication must be sent contemporaneously with the writing. If contact is by electronic communication, [7] a firm may hyperlink directly to the Educational Communication. If contact is oral,[8] the firm or representative must notify the former customer that an Educational Communication that includes important considerations deciding whether to transfer assets to the firm will be provided not later than three business days after the contact. Accordingly, the Educational Communication must then be sent within three business days from such oral contract or with any other documentation sent to the former customer related to transferring assets to the firm, whichever is earlier.
who drafts the educational communication?
Luckily in order to minimize the burden on firms, FINRA has already drafted a stock form, which could be found on its website.
express rejection by a former customer negates the obligation
If the former customer expressly states that they are not interested in transferring their assets to the new firm (i.e., not interested in following their current broker to the new firm) the Educational Communication requirement is not applicable.[9] However, if the customer later decides to transfer their assets to the new firm without further individualized contact within the period of three months following the date the representative begins his or her employment or associates with the firm, then the educational communication is required to be provided with the account transfer approval documentation. [10]
Partner Ian J. Frimet, Esq. has a substantial amount of experience in compliance with securities laws. If you are a broker or broker-dealer with questions in regards to your compliance with these rules and regulations please do not hesitate to contact Ian at (516) 222-2230 or ifrimet@wbhulaw.com.
Associate attorney Mario C. Lattuga, Esq. concentrates in W&B's securities and complex commercial litigation practice groups. If you are a broker or broker-dealer with questions in regards to your compliance with these rules and regulations please do not hesitate to contact Mario at (516) 222-2230 or mlattuga@wbhulaw.com
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