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June 1st, 2016
securities
SEC APPROVES RULE REQUIRING FIRMS TO SEND AN EDUCATIONAL PAMPHLET TO THE FORMER CLIENTS OF THEIR NEWLY HIRED REPRESENTATIVES

SEC APPROVES RULE REQUIRING FIRMS TO SEND AN EDUCATIONAL PAMPHLET TO THE FORMER CLIENTS OF THEIR NEWLY HIRED REPRESENTATIVES

The SEC recently approved the adoption of FINRA Rule 2273 which creates an obligation to deliver educational communication in connection with firm recruitment practices and account transfers.  The new rule affects financial firms that want to recruit the former clients of newly hired representatives.  These firms will now be required to provide the potential customers with an educational pamphlet.  The Rule becomes effective November 11, 2016. 

The pamphlet must be distributed to the newly hired representative’s former clients within three days of when they are contacted about potentially transferring their funds.  However, the rule would not be triggered if the client expressly states that he or she is not interested in transferring assets to the new firm.  The rule would also apply to former customers who are not contacted about transfer but who transfer or attempt to transfer funds to the new firm anyways.  However, any communication between the representative and former client after three months of the representative’s move would not trigger the requirement under Rule 2273. 

The pamphlet identifies a series of questions that clients should ask themselves prior to moving their funds.  First, clients are asked if financial incentives would create a conflict of interest for their former representative, and the pamphlet recommends the clients identify the reason their representative left the old firm.  Second, clients are asked whether they can transfer all of their assets to the new firm, and what the costs may be if they cannot.  Third, clients are advised to identify all costs they might incur when changing firms.  Fourth, clients are advised to compare the products and services of their current firm and the new firm.  Lastly, clients are asked what types of personal service they will have access to if they decide to switch firms. 

The new rule is designed to educate investors about the implications of switching to a new firm simply because their representative made the switch.  As always, we remind our clients to take all steps necessary to ensure compliance with this new rule.

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