The ongoing debate about who owns client relationships has yet to be won. Last week, the comment period closed on a proposed SEC amendment to existing client-privacy rules, which would suggest that, ultimately, broker/dealers own the client relationship. But the industry is still bickering on this point: Independent b/ds and reps say ownership belongs to the reps.
The SEC's proposed amendment to Regulation S-P, which requires the explicit consent of a client before his/her information is offered to a third party, provides b/ds and their advisors guidelines for protecting client information. The proposed changes would, among other things, allow departing reps to take client data - including the customer's name, address, telephone number and email - with them to a new firm, and to provide general descriptions of accounts and products held by those clients to a new firm. Many large national wirehouse firms are pleased with the proposal, and say it mirrors a so-called protocol that they've been using for several years. But the general opinion from independent b/ds and their reps is this: It's not enough. They want reps to have more control over client information.
The amendment comes two years after the SEC told Next Financial, an independent b/d in Houston, that it had violated Regulation S-P by accepting client information from incoming reps, using that information to fill new account forms, and doing so without client consent, and before the reps had officially joined the firm. The news put independent b/ds on edge, considering the practice of collecting client information prior to a rep's official hire is common in the indie b/d industry. Many firms responded by adjusting their client-privacy notices to say reps could take investor information with them upon departure from the firm. But they would need to do more if the proposed rule amendment is adopted.
Indeed, in its comment letter to the SEC, the Financial Services Institute, the independent b/d industry's lobbying group, said it will not support the proposed amendment as is, and "encourages significant revisions." The proposed changes will "create significant burdens for independent broker-dealer firms and require the allocation of considerable resources by broker-dealers to review and revise existing privacy and data security policies and procedures," the group's comment letter states.
Independent b/ds-unlike wirehouses-believe the client relationship belongs to the advisors, not the firm. Independent reps run their offices individually and receive client information directly. However, the SEC's proposed changes say a rep must get consent from each of his clients before switching b/ds and taking the information with him. That task, some in the independent world say, is ridiculous considering the information is already stored in reps' personal offices. (Advisors can take basic information like clients' names, addresses, telephone number, email, and a general description of the kinds of accounts clients hold.) The FSI says the additional steps required by the SEC rule amendment "dramatically slow the processing and add significant costs for staffing and communications."
Meanwhile, Wachtell, Lipton, Rosen and Katz, a New York-based law firm, responded to the SEC's proposal on behalf of Citigroup, Merrill Lynch, Wachovia Securities and Morgan Stanley-a group of wirehouse firms that employ over 60,000 reps. The firms' "strong support" of the SEC's proposal comes as no real surprise because they are self-selected members of a pact whose rules resemble much of what the Commission has proposed. The Protocol, as it's referred to, was developed in 2004 by UBS, Smith Barney and Merrill Lynch. Today, 54 b/ds and RIAs have signed on. Essentially, the protocol governs the transmission of limited customer information (client name, number, address, email and account title) when a broker leaves one signatory firm to go to another signatory firm. So long as the terms of the pact are met, the broker can rest assured that his former employer will not file a temporary restraining order that may prevent him from contacting clients. The SEC's proposal "will promote objectives underlying the Protocol including customer service and choice in connection with the movement of a [broker] from one broker or advisory firm to another and furtherance of customer privacy interest," the letter states.
According to the SEC website, the commissioners will now consider what they have learned from the public comments, and will submit specifics for a final rule amendment. The SEC will then vote on whether to adopt the amendment.
