(Reuters) - The Financial Industry Regulatory Authority’s board has approved a measure that would require brokers to tell certain clients about compensation they receive when they switch firms, the regulator said on Thursday.
The board has authorized FINRA to send the proposal to the U.S. Securities and Exchange Commission, which must review and approve all changes to FINRA’s rules.
Disclosing a hefty bonus would inform investors of a conflict of interest their brokers may have when they ask clients to switch firms along with them, according to Richard Ketchum, FINRA’s chief executive.
Switching firms could be costly to investors, who may have to sell certain securities, such as brokerage-branded mutual funds, that are not available through their broker’s new firm, he has said.
“This proposal is about making sure the customer can make a fully informed decision to follow a broker to a new firm and understand the costs associated with transferring his or her account,” Ketchum said in a statement.
Firms would also be required to report to FINRA significant increases in total compensation paid to newly recruited brokers during their first year. FINRA will use information in industry-wide examinations to look for certain sales abuses that may be motivated by a broker’s compensation increase.
The trigger for reporting would be an expected increase of 25 percent or $100,000 over the prior year’s compensation, whichever is greater.
The disclosure requirement would apply to recruitment compensation - including signing bonuses - of $100,000 or more, and to future payments contingent on performance criteria.
While the largest brokerage firms supported such a plan, it has been controversial because some firms and brokers are reluctant to make those disclosures and fear it would ultimately limit compensation.
Such a rule, however, would shed more light on the brokerage recruiting world, where signing bonuses for top brokers have become outsized, with top firms offering as much as 160 percent to around 195 percent of a broker’s annual trailing revenue production upfront for making a move.
That would mean a broker generating $1 million in annual revenue could receive nearly $2 million on day one, with additional promised compensation for meeting certain targets down the road, according to industry lawyers and recruiters.
FINRA began discussing the possibility of a bonus disclosure plan in late 2012. The regulator collected input from the securities industry about the plan early this year.
FINRA must seek permission from its board of governors for sending rule proposals to the SEC for review and final approval.
Additional reporting by Ashley Lau in New York; editing by Matthew Lewis