Broker-Dealer Alert
Planning for Compliance with FINRA Rule 2273
June 29, 2016
By Joel R. Beck, The Beck Law Firm, LLC
In May 2016, FINRA announced via Regulatory Notice 16-18 that the SEC approved a proposal
to adopt FINRA Rule 2273 – Educational Communication Related to Recruitment Practices and
Account Transfers. The Rule becomes effective on November 11, 2016, but I think that firms
would be wise to begin considering and preparing for compliance with this rule now.
In a nutshell, Rule 2273 concerns situations when a registered representative moves from one
broker-dealer firm to another. In that situation, the Rule requires the new firm to provide an
educational document written and designed by FINRA to persons who had been clients of the
representative at the old firm, whenever the representative contacts that former client to seek to
transfer assets to the new firm during the period of three months after the representative joins the
new firm. In addition, should the former client attempt to move assets to the new firm under the
representative’s number prior to being contacted by the representative or the new firm, the new
firm must deliver the educational document with the account transfer approval documents.
As firms begin to determine how to comply with the new Rule, there are a few important points
to consider:
1. The Rule places the responsibility for delivery of the educational document on the member
firm. Firms then, should be particularly alert to develop internal systems and procedures to
ensure that representatives and principals are trained on compliance with the Rule and related
internal procedures of the firm, and to be able to test and review compliance in that regard. It
likely will not be a strong defense for a firm to point the finger at their representative and blame
him or her when the regulators identify compliance failures in this area.
2. The delivery of the educational document must be done within certain time periods. If the
initial contact is in writing, the educational document must accompany it; if that initial contact is
via an electronic communication, a hyperlink to the document may be used. If the initial contact
is oral, the representative (or member) must notify the former customer orally that the document
will be provided within three business days, or earlier if other written documentation is sent to
the former client regarding transferring assets.
3. The time period for which delivery of the educational document is required is for the period
of three months after the representative begins employment or associates with the member firm.
Importantly, the Rule does not state that it applies only to representatives who join a new firm on
or after the effective date of November 11, 2016.
© 2016 The Beck Law Firm, LLC
Consider this scenario: A representative joins a new broker-dealer in mid to late August 2016,
but is still contacting clients for the first time on or after November 11, 2016. Accordingly, those
contacts would fall under the scope of the Rule, and the firm must therefore comply with the
terms of the Rule, including delivery of the educational document.
4. The educational document may not be modified by a firm (or representative). Rather, the
document, as drafted by FINRA, must be the one utilized to be in compliance with the Rule. You
can find a current version of the educational document here on FINRA’s website.
5. Pay attention to the Rule’s Supplementary Material, “.02 Express Rejection by Former
Customer.” This paragraph provides that if a representative contacts a former customer about
transferring assets and that former customer expressly states that he or she is not interested in
moving his or her account/assets to the new firm, but then later (within 3 months of the
representative joining the new firm) decides to move assets to the new firm without further
“individualized contact”, the new firm must then deliver the educational document. It is not at
all clear what “individualized contact” means, but what is clear is that the new firm will have to
track communications and monitor compliance with the rule.
6. There is no difference in the Rule for different types of firms. The Rule applies to a “member
that hires or associates with a registered person” and that will cover every broker-dealer.
Obviously, this captures independent model firms that often do not “hire” representatives but
associate with them as independent contractors. The Rule’s requirements are the same regardless
of whether the firm operates on a traditional branch office model or an independent model basis.
7. Understand that the new Rule does not modify other obligations of the representative with
respect to confidentiality of client information, covenants not to compete or not to solicit, etc.
Representatives must remember that their compliance with this Rule (and their new firm’s
procedures relating to it) does not eliminate any obligation they have under other rules,
regulations and any contracts or agreements with other firms.
8. Like everything else, documentation is key. We can expect FINRA to start testing
compliance with the new Rule once it is effective on November 11, 2016. One of their first
compliance tests will be to check the adequacy of a broker-dealer’s written supervisory
procedures and internal controls relating to the new Rule. Firms should work to ensure that they
have documented reasonable procedures, trained key personnel on the Rule and procedures, and
adopt and enforce a system to monitor and ensure compliance with the Rule.
The Beck Law Firm, LLC represents clients in the area of financial markets regulation, including
broker-dealer and investment adviser compliance. For more information about the firm, visit us
at www.thebeckfirm.com.
The Beck Law Firm, LLC
232 West Crogan Street, Suite C
Lawrenceville, GA 30046
678-344-5342
© 2016 The Beck Law Firm, LLC