More On Legal & Compliancefrom The Advisor's Professional Library
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
In this column I will address a specific issue that has increasingly become the subject of much discussion in the investment advisory industry: the "Protocol." What is this "Protocol?" Why is it germane to investment advisors? The simple answer is that it is not unless you are an existing investment advisor seeking to hire a wirehouse broker, or a wirehouse broker seeking to leave his or her broker/dealer to start your own advisory firm.
The Protocol for Broker Recruiting originated in 2004 between Citigroup for its Smith Barney unit, Merrill Lynch, and UBS Financial Services, Inc. The principal goal of the protocol was to further clients' privacy and freedom of choice as advisors move between firms. If a departing advisor follows the protocol, neither the advisor nor the new firm has any monetary or other liability. However, the protocol does not bar the prior firm from bringing a claim for raiding. The protocol is to be implemented and adhered to in good faith.
The protocol has become increasingly popular. The majority of the protocol member firms joined the protocol in the past few months as of this writing in early January 2009. Most new protocol member firms appear to be registered investment advisory entities, as opposed to broker/dealers.
If you are an RIA firm, should you join the protocol for broker recruiting? If I am an individual advisor, what might happen to me if I leave a protocol member firm for a firm that is not a member of the protocol? What can I do as a member of the protocol? What can't I do as a member of the protocol?
To assist me with the answers to these issues, I have called upon the expertise of my partner, Brian Carlis, who, along with my other colleagues at Stark & Stark have successfully addressed transition-related issues for many years.
I intend to leave my current employer to go to a firm that is not a member of the protocol. If my current employer chooses to go after me, what can I expect?
Typically an employer sends a cease-and-desist letter reminding the broker/advisor of obligations set forth in any nonsolicit agreement and admonishing the advisor to adhere to the agreement or face possible legal consequences. If the company chooses to "go after" the broker/advisor, the advisor can expect the employer to seek a temporary restraining order in either a federal or state court. This restraining order routinely is granted to maintain status quo and prohibits an employee from soliciting accounts pending an injunction. Even if an injunction is granted, the court won't stop the filing of Automated Customer Account Transfer (ACAT) forms. However, the court will stop the solicitation of accounts. Normally, within 10 days after a temporary restraining order is issued, the court either schedules a date for a preliminary injunction hearing or transfers the matter to FINRA for a Rule 13804 hearing. Such a hearing is typically held within two weeks of the issuance of a temporary restraining order. The Rule 13804 hearing is held to determine if the injunction should continue, be vacated, or modified. After the Rule 13804 hearing decision, the FINRA panel schedules the case for a damages hearing, if necessary. During this process, the overwhelming majority of cases settle.
I am leaving a protocol member firm to start up my own, independent investment advisory business, should I join the protocol?
By joining the protocol, neither you nor your new firm will have any monetary or other liability to the former firm. Provided that the terms and conditions of the broker protocol are strictly adhered to, you will be able to solicit and transfer your accounts to your new investment advisory firm.
How much does it cost to join the broker protocol?
There is no cost to join the broker protocol and there is no annual or other fee imposed to continue as a member.
What if I join the broker protocol and later no longer wish to be a member?
A member of the broker protocol may withdraw at any time. Ten days prior written notice of withdraw is requested, but not required. To date, only one member of the broker protocol has withdrawn.
As a protocol member, am I permitted to take notes or files from my current clients to my new employer?
The law is fairly clear that a departing advisor should not bring any customer information to a new employer. Typically, customer information is considered confidential and proprietary to the employer. Therefore, a departing advisor copying information about clients will be subject to the return of that information and may provoke litigation. Additionally, the departing advisor may need to purge computers and sign an affidavit stating he isn't taking confidential or proprietary information.
What liability can I have under the broker protocol?
When followed appropriately, the protocol acts as a waiver against liability for a financial or investment advisor who leaves the employment of one firm and solicits former customers to transfer their brokerage accounts to the new firm--assuming the new employer also is a member of the protocol. The exception to this general provision applies to claims of "raiding" between protocol firms. Raiding claims are not waived by the protocol.
What can I do under the broker protocol?
You can take the following information regarding the accounts you serviced at your "old" firm:
o Client name
o Client address
o Client phone number
o Client e-mail address
o Client account name
What else should I do?
Resign in writing to your local branch management.
Along with your resignation letter, give your local branch management a copy of the client information you are taking with you. This is particularly: The information you leave with branch management will include account numbers (with matching account names) of all the accounts you serviced. However, you are not permitted to retain a copy of this information.
Use good faith when compiling the list of clients you serviced, and consult with an attorney to answer your questions.
What can't I do under the protocol?
I'd recommend that you:
o Don't deliver your resignation orally.
o Don't take any customer information not specified above (especially Social Security or account numbers).
o Don't forget to include account numbers in the customer information list you leave behind.
o Don't forget to give the customer information list to your old branch management at the exact same time you deliver your resignation letter.
o Don't be overgenerous with yourself on accounts you share with others. This is particularly important if you were working in partnership with another advisor.
o Don't pre-solicit accounts before you resign.
o Don't take any information about accounts you did not directly service.
o Don't take copies of holding pages, monthly statements, or any other client documents not specified above.
What else should I be thinking about?
Statistics show that between 50% and 90% of an established advisor's book will normally transfer to his or her new employer. Of course, there are many factors to determine the number of accounts that will transfer. These factors include the particular relationship between the advisor and the client, as well as other 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 about my sales assistant?
If you are confident that your sales assistant will leave with you, it may be important to have confidential discussions with your sales assistant shortly before you plan to resign from your current employer. It is not advisable to involve the sales assistant before you've decided to depart or not. We have seen many situations where a sales assistant will gossip with other sales assistants in the office, thereby alerting management of the advisor's impending departure. Therefore, we suggest that you advise the sales assistant that you are leaving immediately before the resignation will occur.
Let's review what we're talking about. In 2004, the Protocol for Broker Recruiting was signed by several major brokerage firms with the pronounced goals of curtailing litigation and arbitration between member firms, allowing departing advisors to take limited customer contact information, and to further clients' interests of privacy and freedom of choice in connection with the movement of financial advisors between member firms. Since 2004, many firms, both large and small, have joined the protocol.
The protocol, if followed, is an effective agreement for the transition of financial advisors and their clients. However, if one of the firms is not a member of the protocol, the protections of the protocol will not apply. Any questions regarding the protocol should be directed to knowledgeable legal counsel.
Thomas D. Giachetti is chairman of the Securities Practice Group of Stark & Stark, a law firm with offices in Princeton, New York, and Philadelphia that represents investment advisors, financial planners, broker/dealers, CPA firms, registered reps, and investment companies, and a regular contributor to Investment Advisor. He can be reached at email@example.com.