Q:

The owner of the company where I used to work is trying to stop me from selling my book of business. He's emailed everyone in my former office telling them not to talk to me. That's strange because while I was fired for not hitting production goals, it's not as if I am or was a compliance problem. I suspect he wants to have my book of business to divide amongst the rookies in the office.

Since he's not helping me keep the clients with his company, my next plan is to contact a couple buddies at other firms and see if they're interested. What do I have to be careful about if I do this?

A:

Who owns the clients? It has been a big question since the dawn of retail brokerage. The answer, which has sharpened up dramatically in the past few years, is a rather obvious one: Neither broker nor firm. The clients get to do business with whomever they choose.

It was not always this way. Until not too long ago, the firm losing the business could confidently march into court and obtain an injunction preventing the transfer of customers' accounts and assets to the new firm. The losing firm would feign shock and horror that a “departing broker” had, very secretly, struck a lucrative deal for himself at a new shop, copied all of the client information necessary to replicate his business at his new address, given a wink and a nod to his faithful assistant about a better office location, made a thumb print on a release form and then resigned at 4:00 p.m. one Friday afternoon. After the losing firm filed papers calling the departing broker a thief and scoundrel, the court would act to stop or slow down the flow of assets and production from that losing firm. Of course, the losing firm never bothered to tell the court that it encouraged the flocks of arriving brokers it was constantly recruiting to do the very same things it was so up in arms about.

But in November 2001, the North American Securities Administrators Association partially stopped the madness by issuing a Statement on Brokerage Account Transfers (later adopted as NASD IM 2110-7). It says, in essence, that firms cannot interfere with the transfer of customer assets, but it can seek to enforce non-solicitation agreements and obtain monetary damages resulting from defection.

This big step forward for broker flexibility was followed in 2004 by the Protocol for Broker Recruiting, to which all of the traditional wirehouses are now party. The Protocol attempts to set a standard to be followed by job-swapping producers, which, if followed, essentially gives the producer a free pass and eliminates litigation. So, these two changes have resulted in an environment where brokers are treated more as service professionals when they change jobs than as horse thieves, as they were in the past.

So, moving to a new firm or selling your “book” should be a piece of cake, right? Think again. At any of the significant national and regional retail firms, bank broker/dealers or financial planning shops, post-termination restrictive covenants contained within offer letters or “employment agreements” have never been more in vogue. The financial services firms believe passionately that the enormous investments they make in their businesses should not be injured because a producer decides to pick up and take “his book” to a new location.

And, this historic economic concern has now been buttressed by federal legal requirements regarding client privacy. Those notices stuffed into your clients' monthly statements regarding privacy policies emanate from the Gramm-Leach-Bliley Act of 1999, which requires the protection of financial information obtained from customers, and a pledge not to allow its use outside of the firm. Thus, the good news brought by IM 2110-7 and the Protocol is dampened by the realities of the firms' protections of their investments and very real concerns about identity theft and invasions of privacy. Indeed, the Securities and Exchange Commission has announced that it intends to bring an enforcement action against one independent broker/dealer that encourages recruits to deliver confidential customer information to the firm without the customers' express consent.

Where does that leave you? In peril, basically. You are up against the economic realities of firms eager to protect the sizeable investment they have made in you (and your clients) and the legal protections they enjoy based on contract, trade secrets and unfair competition laws.

This little armada, coupled with structural changes in the industry such as the rise of deferred compensation and longer-term transitional compensation deals, and the decline in outright purchase of production by firms, has changed the recruiting game: The late-Friday-afternoon drill of firms swapping brokers across the country is largely a memory. So, it is imperative then for you to leave as a professional and with integrity.

Anthony Paduano,
Paduano & Weintraub LLP
New York
212-785-9100
ap@pwlawyers.com

The Ethical Rep is our monthly column through which more than 30 prominent securities industry attorneys, experts and law school professors answer questions you, our readers, send anonymously to us.

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