More On Legal & Compliancefrom The Advisor's Professional Library
- Updating Form ADV and Form U4 When it comes to disclosure on Form ADV, RIAs should assume information would be material to investors. When in doubt, RIAs should disclose information rather than arguing later with securities regulators that it was not material.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
It’s one thing for a wirehouse broker to reap the benefits of independence, including bigger payouts at independent BDs or 100% "payouts" if you become an RIA, but in a new whitepaper, securities attorney Patrick Burns warns such brokers not to overlook the obligations they may have under recruitment or retention packages that they signed with their old brokerage firms.
“A lot of people get star struck by the dollars put in front of them” when it comes to such packages, but Burns (left) reminds them that there’s a cost to that money. “The devil is in the details,” he said in a Friday interview, including “significant strings and the tax implications of forgivable debt,” and if the broker wants to go independent, “ they want their money back.”
Burns says that when his firm interviews wirehouse brokers who are thinking of leaving and want to retain Burns, one of the first questions he asks is if the broker has a recruitment or retention package, followed by “What’s your financial condition? Do you still have the money? What are your intentions with regard to the promissory note?”
The responding brokers “are all over the map,” he says. Some have the money to pay off a promissory note, but many do not. And if they leave for another wirehouse, in their new position, “all their production is getting eaten up by paying back what they owe or putting money aside for taxes.”
Burns says many brokers have the “unrealistic expectation” that if they move from one firm to another, they could just roll over their old debt for new debt, “kicking the can down the road.” But he warns, “You could get an even more draconian agreement.” The wirehouses, he says, “ have caught on and have tightened the terms of the notes as they’ve run into collection problems.”
A good securities attorney can negotiate a discount on an existing note, he says, or even a new one, though much depends on “how deep into the promissory note they are. If someone has eight years left on the note and they don’t have the money, that’s going to be tough.” However, if a broker is “six years into a seven-year note ... that can be done.” Though he warns that “the one thing that seems to irritate the wirehousess is people who leave with retention money.”
In the interview and the whitepaper, Burns counseled that “if you have a large note balance, and you’re thinking of starting an independent RIA, and you have to settle this” by paying back the note in a lump sum or over time, “you have to look at what your quarterly revenue stream will be like” once you go independent to see if you can handle those payments.
Don’t count on the independent BDs or custodians to help you with your legal issues in this area. “Most of the large custodians and BDs are very cautious about giving legal advice,” Burns says. “They’ve instructed their sales teams not to do that,” both because they can’t act in a legal capacity, and because they “don’t want to be on the hook for doing so.”
All is not lost for wirehouse brokers considering independence, however. Burns says that in doing the research for the whitepaper on some FINRA arbitration cases on departing brokers with note balances, “we came across cases where reps were successful in pushing back on the wirehouse firms.”
While he laments that FINRA doesn’t divulge the reasons why those reps were successful, just the end result, “reps are not always losing those cases,” though he warns that even then the process takes time, “maybe a year or two.”