More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Agency and Principal Transactions In passing Section 206(3) of the Investment Advisers Act, Congress recognized that principal and agency transactions can be harmful to clients. Such transactions create the opportunity for RIAs to engage in self-dealing.
I've had the privilege of assisting over 1,000 wirehouse brokers in their decision to go independent. There are two major issues for a registered representative to consider. The first is how to leave. The second is appropriate registration and ongoing regulatory complance requirements.
The relationship between a wirehouse and its reps is generally that of employer-employee, pursuant to which the employee rep provides services directly from wirehouse branded and supervised offices. Generally, there will be some type of employment agreement between the rep and the firm, which will include a restrictive covenant provision. However, the once typical contentious divorce of rep from his firm is no longer the norm, provided that the broker leaves in a manner that does not violate "protocol" limitations. What does this mean?
The principal goal of the Protocol for Broker Recruiting, which originated in 2004 between Citigroup, Merrill Lynch, and UBS, was to further clients' privacy and freedom of choice as financial and investment advisors move between firms.
Although the protocol was intended to apply to broker/dealers (typically when a rep leaves one wirehouse to join another), its joining and corresponding standards appear to have been extended to those situations when a rep leaves to start his own independent advisory firm. Under the protocol, a rep is permitted to take limited information regarding his clients (i.e., client name, address, phone number, e-mail address and account name).
Other than the above protocol information, a departing rep should not bring any other customer information to a new employer. Typically, customer information is considered confidential and proprietary to the employer. Therefore, a departing rep copying information about clients will be subject to the return of that information and may provoke litigation. Additionally, the departing rep may need to purge computers and sign an affidavit stating that he isn't taking confidential or proprietary information.
Provided that the terms and conditions of the broker protocol are strictly adhered to, the rep will generally be able to solicit and transfer accounts to the new investment advisory firm without monetary liability to the rep's previous wirehouse employer (assuming the rep does not owe the firm money on a promissory note or otherwise).
However, exceptions can and will apply. For this reason, it's critical that a rep who is thinking about going independent obtain experienced legal counsel to review all issues, including any employment agreement, the proper way to leave, and will the rep associate with an independent broker/dealer.
For the departing rep, depending upon the manner in which the new advisory firm provides services and the amount of assets under management, he will form a firm that will register with either the state or the SEC. The rep will assume responsibility for its newly formed advisory firm's initial and ongoing compliance with state and/or SEC regulatory requirements. While certain independent broker/dealers may provide assistance, the rep retains direct entity responsibility. The rep should seek separate initial and ongoing professional assistance.
Compliance is not, and need not, be difficult if the rep understands from the commencement of his independent firm what is required to fulfill his regulatory responsibilities, and, just as important, what is not required. Too many firms spend too much time and resources because they have not tailored their compliance efforts to the scope of the firm's operations. There is no such thing as "compliance in a box" and one size never fits all. The scope of the firm's compliance efforts will directly depend upon the scope of the firm's advisory operations.
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.