Educational Communication on Recruiting

When a registered representative changes firms and contacts former customers about moving their accounts, the FINRA recruiting-disclosure rule requires the new firm to deliver a FINRA-prepared educational communication to those former customers. The rule protects the former customer by ensuring they understand the cost, portability, and incentive considerations before agreeing to move assets. Effective November 11, 2016.

What is the purpose of the FINRA recruiting-disclosure rule?

The recruiting-disclosure rule requires a member firm that hires or associates with a registered person to deliver a FINRA-prepared educational communication to any former customer of that registered person who is contacted about transferring assets to the new firm.

The communication is designed to prompt the former customer to consider:

• Costs and potential account transfer fees
• Asset portability: which products may or may not transfer in kind
• Incentives paid to the rep for moving (recruitment bonuses, deferred compensation, back-end bonuses)
• Other conflicts of interest

Exam Tip: Gotchas

• The educational communication is FINRA-prepared; the firm does not write it. The firm's obligation is to deliver the FINRA document within the rule's timing. A firm that drafts its own "educational communication" and delivers that instead has not satisfied the rule.
• The recruiting-disclosure rule applies to former customers of the registered person at the prior firm, not to brand-new prospects. It is targeted at the recruiting-and-moving scenario specifically, not at general prospecting the rep does at the new firm.

What are the delivery requirements of the recruiting-disclosure educational communication?

Trigger

The delivery obligation is triggered when either:

• The member or rep individually contacts the former customer about transferring assets, OR
• The former customer, absent individualized contact, transfers assets to an account assigned to the moving rep

Timing of Delivery

The delivery timing depends on the form of contact:

Duration of the Obligation

• The recruiting-disclosure rule applies for a period of 3 months after the registered person begins employment or association with the new member
• After 3 months, the rule no longer applies, though general suitability, cost disclosure, and Regulation Best Interest (Reg BI) obligations continue

Express-Rejection Exception

• The delivery requirement does not apply when the former customer expressly states that he or she is not interested in transferring assets to the new member

Think of it this way: The 3-month window is a protective buffer. During those first 3 months at the new firm, FINRA assumes the rep may be contacting former customers with a bonus-driven incentive behind the pitch. The FINRA-prepared communication exists to make sure the former customer hears a neutral third-party voice before deciding to transfer.

Exam Tip: Gotchas

• The 3-month window begins when the rep joins the new firm. Contact with former customers about transferring assets during that 3-month window triggers the delivery obligation. After 3 months, the recruiting-disclosure rule no longer applies.
• Oral contact triggers a 3-business-day follow-up delivery window. If the rep calls a former customer, the rep must orally notify them that the educational communication will follow, and the firm must deliver it within 3 business days or with any transfer-related documentation, whichever is earlier.

What is included in the recruiting-disclosure educational communication?

FINRA prepares the document; the firm delivers it. The FINRA-authored communication prompts the former customer to ask the moving rep about:

• Will incentives (recruitment bonuses, deferred compensation, back-end bonuses) paid to the rep affect the rep's recommendations?
• Will the former customer's existing assets transfer to the new firm, or must some be liquidated (triggering taxes or surrender charges)?
• What are the costs of transfer: account transfer fees, new account fees, retirement account fees?
• Will the level of service change?
• Are there different products the customer will be offered at the new firm, and are they more or less expensive?

Exam Tip: Gotchas

• The recruiting-disclosure rule focuses on the customer's right to understand the rep's incentives and the portability of the customer's current holdings. A question asking what the educational communication covers points back to these five themes: incentives, portability, costs, service, product differences.
• The rule does NOT prohibit the transfer. It provides the former customer with information to make an informed decision. If the former customer wants to transfer after receiving the communication, the transfer proceeds through the customer-account transfer rule's ACATS process on the standard timeline.