Retrospective on the FINRA “Client Engagement” Rule

Shawn Baxter, CAMS, Manager, Centralized Compliance Controls
March 22, 2019

The Opportunity FINRA Created

We operate in a heavily regulated industry, yet each rule that exists today was created with the best of intentions. Those intentions typically focus on client or investor protection. When FINRA creates a new rule, compliance professionals like me already understand why the rule was created, yet we find ourselves thinking about the negative impact the new rule will have on the firm. We ask ourselves, “Will I need to hire additional staff? Will system enhancements be necessary?” The focus is not on the benefits or opportunities but, instead, on how we will comply, how long it will take and how much it is going to cost. I do not often find myself thinking about the positive impact or potential opportunities imbedded within a new rule, beyond investor protection of course. Until FINRA Rule 2273, that is.

It has been over two years since FINRA Rule 2273, Educational Communication Related to Recruitment Practices and Account Transfers, became effective. The intent of the rule was to educate investors on several important items to consider when deciding to follow their financial advisor to a new broker-dealer. The rule essentially requires that a financial advisor provide their client with a FINRA-prepared educational document that provides insight to help the client to determine whether or not to transfer their account and follow their financial advisor to the new firm.

Compliance professionals seek to draft policies and procedures that can be efficiently and effectively supervised or enforced. The rule was written broadly to account for a variety of different scenarios in which the financial advisor would need to provide the client with the educational document. The requirements of the rule become applicable once individualized contact occurs. The idea of creating a policy that could be efficiently and effectively supervised based on when a new financial advisor makes contact with their client regarding the transition was daunting. How can I ensure a client is mailed a document within three days of a phone conversation? The answer was easy, and it did not focus on which clients were contacted and when.

The decision to move from one broker-dealer to another is not one that is made lightly. The broker-dealer is an extension of the financial advisor’s practice, a business partner that provides access to financial products and platforms, client support, compliance support, technology resources, marketing support, product analysis and much more. The decision to work with a new business partner is only made after an extensive due diligence process shows there will be a net benefit to that advisor’s firm, which would translate to a net benefit to the firm clients. This decision and the benefits of forming a new partnership need to be celebrated with everyone that will be impacted—and the largest population impacted is the financial advisor’s client population.

What makes FINRA Rule 2273 stand out is that the key to complying with it is client engagement. It is based on the premise that the financial advisor is engaged with all of their clients and has exciting news to share with them about the new business partnership, a message they should want to share as soon as possible. Rather than trying to create supervisory procedures around individualized initial contact, FINRA Rule 2273 leverages the financial advisor’s desire to engage all their clients as soon as possible. Incorporating the FINRA-prepared educational document with an initial announcement creates a single process that accomplished multiple objectives in a single, efficient and effective policy.

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