More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
As I indicated in my previous column on the subject of transition planning for advisors ("Hold On to Your Clients"), this month I am calling upon the expertise of my partners, Thomas B. Lewis and Brian A. Carlis, to address specific issues that investment professionals must deal with when considering a career transition. For years, Tom and Brian have successfully addressed these issues for broker/dealers, investment advisors, and individual investment professionals throughout the country, including NASD registered representatives considering a transition from a broker/dealer to a registered investment advisor, and, to a lesser extent, an existing representative of a registered investment advisor leaving to start his own firm. I asked Tom and Brian the following questions, and they replied together in writing.
I am thinking about leaving my current job as a financial advisor to join another company. I plan on changing to a registered investment advisor. What should I do? What should I be thinking about?
There are many issues to be reviewed before making a decision to leave your current employer. Experienced counsel should be consulted. Every case has similarities, and every case has differences. Counsel needs to be experienced with trends in the industry and with the nuances of each company, but there are many typical questions.
First, how long have you been employed? Did you start at your current firm or did you leave an existing position with a book of business transferring over to your current employer?
Second, when you joined your current employer, did you sign any type of a restrictive covenant agreement, non-solicit agreement, or confidentiality agreement?
Third, what, usually, does your current employer do with a departing advisor?
Fourth, have you recently signed any promissory notes, received any retention bonuses, or do you have any trading errors that you would be responsible to pay if you leave your current employer?
Fifth, do you have good reason to believe that if you leave your current employer, the majority of your clients will follow you to your new employer?
Sixth, are there any other employees at your current firm that you desire to join you at your new position?
Seventh, what information do you need to successfully transfer your clients to your new employer?
Finally, are you emotionally and financially prepared for the transition?
Let's talk about the first issue--the length of your employment. Why is that important?
The main reason has to do with your book of business. If you were a seasoned advisor when you joined your current employer, you likely brought a clients with you. In many cases, the book of business you bring into your new employer may be able to leave with you if you depart. There is also case law saying that accounts brought into an employer may be available to depart with you, should you choose to leave. Additionally, questions may exist as to the company itself. Many companies have undergone name changes over the last twenty years--some more than once. If you joined the firm twenty years ago, it may have had a different name. There may be legal issues if you signed an agreement with the predecessor of the firm and the agreements have not been updated.
I do not remember if I signed a restrictive covenant. What should I do?
An experienced attorney who has handled financial consultant transition cases can give you an educated guess as to whether your current employer mandates the signing of restrictive covenant agreements. Many firms have a history of requiring incoming advisors to sign restrictive covenants. Further, many brokers starting out with a new firm have signed training agreements. What most advisors do not realize is that a training agreement, in all likelihood, contains a non-solicit agreement prohibiting advisors from soliciting clients they serviced while at the company. The restrictive covenant contained in the training agreement does not expire and will continue to be in force throughout the term of employment.
I have heard many people say that a non-solicitation agreement is "not worth the paper it's written on."
That statement is false. In every state in the country, non-solicit agreements, if reasonable and compliant with the law, are enforceable. There is a distinction between a non-solicitation agreement and a non-compete agreement. Non-solicitation agreements prohibit departing advisors from contacting and soliciting business they serviced while at that employer. However, a non-compete agreement prohibits an advisor from obtaining employment in a related field for a specified period of time. In many states, a non-compete agreement can be challenged and may not be enforced by a court of law, or may be cut down by a court.
Why is it important what my current employer has done with departing brokers in the past?
Some employers will not litigate claims against a departing broker, for a variety of reasons. First, some employers do not require their employees to sign non-solicit agreements. It would be difficult, but not impossible, for an employer to prohibit an employee from soliciting accounts absent a non-solicit agreement. Some firms have taken a position that a book of business belongs to the financial consultant and the company will not interfere with the proper transfer. Other firms routinely litigate and arbitrate claims against departing financial consultants. You will need to contact an experienced attorney to better indicate what your employer may do and to map out a course to follow. (For what's likely to happen if a current employer pursues legal action, see the Web Extras section of this issue at www.investmentadvisor.com .)
Am I permitted to take notes or files from my current clients to my new employer?
The law is fairly well settled that a departing broker should not bring any customer information with her. Typically, customer information is considered confidential and proprietary as to the employer. Therefore, a departing broker copying information about her clients will be subject to the return of that information and may provoke the company to institute litigation. Additionally, computers must be purged and an affidavit may be needed to be signed by the departing broker stating that she does not have any additional information.
How do I know if my book will transfer to my new employer?
Between 50% and 90% of an established advisor's book will normally transfer to his new employer. Of course, there are many factors to determine the number of accounts that will transfer, including the particular relationship between the advisor and the client, as well as related issues. During this process, it is important not to pre-solicit accounts while you are still employed at your current employer. It would be a violation of your legal duty of loyalty if you were to solicit accounts for transfer prior to your resignation from your current employer. Further, there are horror stories about pre-solicitation and management learning of the advisor's pending departure, before the resignation occurs. This will create a forced termination of employment, which will have significant ramifications, including potential U-5 issues.
What information can I take to transfer accounts over to my new employer?
It is best not to take any customer financial information from your current employer. Normally, the law will allow you to use your memory to contact your clients, who can then provide you with copies of financial documents. Taking information from your current employer may violate the law and be subject to immediate return to your employer and will increase the risk of litigation.
What do you mean that I must be emotionally and financially prepared?
The advisor must be prepared to deal with a host of issues, including loss of clients, technology problems, ACAT problems, and the potential for litigation and/or arbitration. However, in the end, it is often worthwhile and satisfying when an advisor departs to an employer and/or business where she can flourish and become successful. A great majority of financial consultants transfer to firms throughout their career. A transfer out of your current employer is not a death march. Rather, a transfer often opens up a world of opportunities and freedom.
Thus, there are many issues for investment professional to consider when making a decision whether or not to make a career transition. Engaging experienced counsel who will be able to provide good counsel will facilitate the decision-making process and help result in a smoother transition process.
Thomas D. Giachetti is chairman of the Securities Practice Group of Stark & Stark, a firm with offices in Princeton, New York, and Philadelphia representing investment advisors, financial planners, broker/dealers, CPA firms, registered reps, and investment companies throughout the U.S. He can be reached at firstname.lastname@example.org.