Frequently Asked Questions Regarding FINRA Rule 2273

Background

In March 2016, the SEC approved the adoption of FINRA Rule 2273 (Educational Communication Related to Recruitment Practices and Account Transfers).1 Rule 2273 establishes an obligation to deliver an educational communication in connection with member firm recruitment practices and account transfers. Specifically, Rule 2273 requires delivery of a FINRA-created educational communication by the member firm that recruited the registered representative (recruiting firm) that highlights key considerations for the representative's former customers in transferring assets to the recruiting firm, and the direct and indirect impacts of such a transfer on those assets. The rule is effective November 11, 2016.2

Frequently Asked Questions

Effective Date

Q1.1. Does Rule 2273 apply if the registered representative was hired by or associated with the recruiting firm prior to the effective date of the rule?
A1.1. No. FINRA interprets Rule 2273 to apply if the registered representative is hired by or associates with the recruiting firm on or after the effective date of the rule. Pursuant to Rule 2273(b)(3), delivery of the communication is required for a period of three months following the date the registered representative begins employment or associates with the recruiting firm. For registered representatives who are hired or associate with a member firm prior to the effective date, the requirements of Rule 2273 will not be triggered if a former customer is individually contacted by the recruiting firm or registered representative or, absent individualized contact, transfers his or her assets to the recruiting firm after the effective date.

Format of Educational Communication

Q2.1. Does Rule 2273 allow member firms to alter the format of the educational communication while retaining the substance of the communication (e.g., by transferring the communication to the firm's letterhead or to a firm-developed brochure or by changing the font size or color scheme of the text in the communication)?
A2.1. No. To facilitate uniform communication under the rule and to minimize the burden on member firms in providing the communication to former customers of a representative, FINRA developed a standardized communication with a FINRA logo for member firms to use to satisfy the requirements of Rule 2273. Accordingly, the Rule does not permit member firms to alter the format or substance of the FINRA-created educational communication or remove the FINRA logo.
Q2.2. Does Rule 2273 allow members firms to provide the educational communication through a hyperlink to the educational communication in an email to former customers?
A2.2. Yes. Rule 2273 allows member firms to provide the educational communication through a hyperlink (i.e., http://www.finra.org/industry/broker-recruitment-notice) to the educational communication in an email to former customers. FINRA interprets Rule 2273 to require that the hyperlink be prominent in the email and link directly to the educational communication and not require the former customer to click on multiple links in order to access the educational communication.
Q2.3. Does Rule 2273 allow member firms to provide the educational communication to former customers as a PDF attachment to an email?
A2.3. Yes. Rule 2273(a) permits a member firm to provide the educational communication to former customers in paper or electronic form. FINRA interprets Rule 2273 to allow member firms to provide the educational communication to former customers as a PDF (or other similar generally available file format) attachment to an email. Where the first individualized contact with a former customer by the registered representative or member firm is by electronic communication, a member firm may either hyperlink directly to the educational communication or attach the educational communication as a PDF (or other similar generally available file format) but need not do both.

Individualized Contact

Q3.1. Would a written or oral communication informing a former customer that the registered representative is now employed by or associated with the recruiting firm constitute "individualized contact" thereby triggering the requirement to deliver the educational communication?
A3.1. Yes. A broad range of communications by a recruiting firm, directly or through the registered representative, constitute individualized contact that would trigger the delivery requirement. These communications may include, but are not limited to, oral or written communications by the recruiting firm or registered representative: (1) informing the former customer that the registered representative is now associated with the recruiting firm; (2) suggesting that the former customer consider transferring his or her assets or account to the recruiting firm; (3) informing the former customer that the recruiting firm may offer better or different products or services; or (4) discussing with the former customer the fee or pricing structure of the recruiting firm.
Q3.2. When would FINRA consider a former customer to have transferred his or her assets to the recruiting firm absent individualized contact?
A3.2. Rule 2273(a) and (b)(2) requires delivery of the educational communication when a former customer transfers assets to an account assigned, or to be assigned, to the registered representative at the recruiting firm absent individualized contact. Among other things, FINRA would consider a transfer absent individualized contact to occur when a former customer decides to transfer assets to the recruiting firm: (1) on his or her own initiative; (2) in response to a general advertisement; (3) in response to a general posting on a social media website; or (4) after learning of the registered representative's transfer from another former customer.
Q3.3. Would Rule 2273 be triggered by unanticipated contact between a registered representative and a former customer?
A3.3. Rule 2273 applies where a member firm, directly or through a registered representative, individually contacts a former customer of that registered representative to transfer assets or where a former customer transfers assets to an account assigned to the registered representative at the member firm absent individualized contact. As such, whether contact that occurs with a former customer is planned or serendipitous is not dispositive; rather, it is the substance of the communication that determines if the delivery requirement is triggered. Thus, unanticipated contact with a former customer (e.g., at a sporting or social event) without a communication from the registered representative to the former customer that would constitute individualized contact about transferring assets would not trigger the requirements of Rule 2273. However, if, for example, the registered representative took the opportunity of the situation to inform the former customer of his or her move to the recruiting firm and the merits of transferring assets to that firm, then the delivery requirement would be triggered.
Q3.4. Does Rule 2273 require that a member firm or registered representative document individualized oral contact with a former customer and the corresponding delivery of the educational communication to that former customer?
A3.4. Rule 2273 does not specify the manner in which member firms should evidence compliance with the rule. Rather, FINRA Rule 3110 (Supervision) requires that member firms have in place supervisory procedures reasonably designed to achieve compliance with FINRA rules. Member firms have flexibility to reasonably design their supervisory systems to achieve compliance with Rule 2273 (e.g., by using training, spot checks, logs of individualized contacts with former customers, certifications or other measures). Consistent with this principle, a member firm may choose to design its supervisory system to require documentation of individualized oral contact with a former customer and the corresponding delivery of the educational communication to that former customer.

Delivery Requirement

Q4.1. Does Rule 2273 allow a member firm to include the educational communication with another written communication (e.g., a letter) announcing that a registered representative was hired by or associated with the member firm?
A4.1. Yes. Pursuant to Rule 2273(b)(1)(A), if the first individualized contact with a former customer by the registered representative or member firm is in writing, the educational communication must accompany the written communication. FINRA would consider a written communication announcing that a registered representative was hired by or associated with the member firm to be individualized contact with a former customer. A member firm therefore could satisfy the rule's requirement by choosing to send some or all of a registered representative's former customers such an announcement letter and include with it the educational communication.
Q4.2. Under what circumstances may the educational communication be included with account transfer approval documentation?
A4.2. FINRA would consider sending the account transfer approval documentation to be individualized contact with the former customer. Pursuant to Rule 2273(b)(1)(A), if sending the account transfer approval documentation is the first individualized contact with a former customer by the registered representative or member firm, the educational communication must accompany the written communication. In addition, Rule 2273(b)(2) requires that if a former customer attempts to transfer assets to an account assigned, or to be assigned, to the registered representative at the recruiting firm absent individualized contact, the member firm is required to deliver the educational communication with the account transfer approval documentation.
Q4.3. Does Rule 2273 allow a member firm to provide an accompanying written communication to former customers explaining the educational communication or providing responses to the questions raised by the educational communication?
A4.3. Yes. Member firms are permitted to provide an accompanying written communication to former customers explaining the educational communication or providing responses to the questions raised by the educational communication. Any such written communication must comply with the requirements of FINRA Rule 2210 (Communications with the Public), including that the communication must be fair, balanced and not misleading. FINRA would interpret a written communication that contradicts the educational communication or suggests that the considerations highlighted in the educational communication are unimportant as being inconsistent with the requirements of Rule 2210.
Q4.4. How should a member firm compute time to ensure compliance with the requirement in Rule 2273(b)(1)(B) that if the first individualized contact with a former customer is oral, the member firm will provide the educational communication not later than three business days after the contact?
A4.4. Consistent with the approach taken in FINRA Rule 9138(b) (Computation of Time), the day when the member firm or registered person individually contacts the former customer should not be included in the computation of time, so the three-business-day period would begin to run on the next business day and would thus run until the end of the third business day thereafter. For example, assuming no intermediate federal holiday, if a member firm individually contacted a former customer on a Monday, the three-business-day period would run until the end of Thursday. If a member firm individually contacted a former customer on a Friday, then the three-business-day period would run until the end of the following Wednesday, again assuming no intermediate federal holiday.

Former Customers

Q5.1. Does the term "former customer" capture a customer who previously held a securities account assigned to the transferring registered representative but did not have a securities account assigned to the registered representative at the time the registered representative gave notice to the current firm that he or she is leaving the firm?
A5.1. No. A customer who previously held a securities account assigned to the registered representative but did not have a securities account assigned to the registered representative at the time the registered representative gave notice to the current firm that he or she is leaving that firm (e.g., the customer held a securities account assigned to the registered representative but transferred the account one year ago) would not be considered a "former customer" for purposes of Rule 2273.
Q5.2. Does the term "former customer" include a customer who held only a non-securities account at the registered representative's previous firm?
A5.2. No. The term "former customer" includes only those customers who held a securities account assigned to a registered representative at the registered representative's previous firm. A customer who held only a non-securities account (e.g., a bank account) at the registered representative's previous firm would not be considered a former customer for purposes of Rule 2273. Furthermore, the term "former customer" would not include a customer who transferred a securities account from the transferring representative's previous firm to the recruiting firm but whose account was assigned to another registered representative at the previous firm.
Q5.3. Does Rule 2273 apply if a former customer who held a securities account assigned to the transferring registered representative at the previous firm opens only a non-securities account at the recruiting firm?
A5.3. Yes. If the former customer was individually contacted about transferring assets to the recruiting firm, a subsequent decision by the former customer to open only a non-securities account at the recruiting firm would not obviate the delivery requirements of Rule 2273. However, the delivery requirements of Rule 2273 would not apply where a former customer who held a securities account at the registered representative's previous firm, absent individualized contact, opened only a non-securities account (e.g., a bank account) at the recruiting firm.

 


1. See Securities Exchange Act Release No. 77430 (March 23, 2016), 81 FR 17513 (Order Approving File No. SR-FINRA-2015-057).

2. See Regulatory Notice 16-18 (May 2016).