Securities Litigation

The SEC has approved FINRA Rule 2273, which requires a transferring representative to send customers an educational communication regarding firm recruitment practices and account transfers. The rule is designed to address situations in which a representative leaves his or her firm and contacts former customers. Noting that "the former customer's confidence in and prior experience with the representative may be one of the customer's most important considerations in determining whether to transfer assets to the recruiting firm," FINRA was concerned that former customers have a "complete picture" of the factors that they should take into consideration when deciding whether to transfer their assets to the recruiting firm. With that in mind, the rule requires delivery of a FINRA-created educational communication that highlights "key considerations" and direct and indirect costs for former customers. The educational communication is required when (a) "the firm, directly or through a representative, individually contacts a former customer of that representative to transfer assets" or (b) "a former customer of the representative, absent individual contact, transfers assets to an account assigned, or to be assigned, to the representative at the firm." The rule is intended to be interpreted broadly, and would include situations when a representative informs a customer that she or he was with his or her new firm, suggests transferring assets, informs a customer of potential benefits at the new firm, and/or discusses fee or price structure. It also includes mass mailings, mass emails, and the like to groups of former customers. Firms must provide the specific FINRA-created form in paper or electronic form and may not use an alternative format. The educational communication must be delivered at first contact with the former customer, and if the first contact is oral, the representative must disclose that the educational communication will be sent to the customer and must send it within three business days (or sooner if sending other written information about transferring accounts). The rule goes into effect November 11, 2016.