Smooth Transitions : Rob Radcliff : Texas Non-Compete Lawyer & Attorney : Langley Weinstein LLP Law Firm : Dallas Employment & Employee Departures : Smooth Transitions Law Blog

Though there are not many broker/dealer defections in the news, movement within the the broker/dealer business continues.  Merrill Lynch recently nabbed several professionals from Wells Fargo and Morgan Stanley.   Though movement does not seems to be as prevalent as several years ago, it continues. Considerations for making a move remain the same.  When considering a move, registered representatives must consider the following:

1. Is the current employer is a signatory to the broker protocol?; and
2. Is the prospective employer a signatory as well?

We've previously discussed the ramifications of the protocol and real world application.  In sum - If the move is between two signatories to the protocol the representative usually has nothing to worry about. However, if the move is between two companies where one is not a signatory the broker could find themselves in the middle of a non-compete or non-solicit dispute.

Increasingly, we are seeing companies use garden leave policies to protect their businesses. Essentially these types of policies provide the employee with paid leave in between jobs. The effect of the garden leave policy is to put the employee out of business and disrupt their ability to transition any business to a new employer or company. These can be very effective.  The professional gets paid for a few months but loses the ability to transition their business.

No Texas court has addressed the enforceability of such provision, but it is likely the provision will have to pass muster under the non-compete statute.  Eventually one of these provisions will be tested in some industry but for now there is no guidance in terms of cases.  When considering making any type of move, consultant a lawyer familiar with these types of issues.  

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 A recent article  from Financial Planning suggests that financial advisors continue to be on the move in 2012.  But the trend is not departures to the traditional wirehouses - instead, they are going independent:

Twelve percent of financial advisors change firms annually, according to [Chip] Roame, but two-thirds of those advisors are still “landing” at another wirehouse. Roame said he expects more advisors to shift to the independent channel. “I think the big elephants have moved,” he said. “The more interesting thing is who might follow.”

Roame expects the traditional wirehouses will try to meet these type of producers half-way by creating an alternative:

Roame said he expected one of the wirehouses would have already responded was by creating a “halfway house” as an alternative for advisors that were considering independence. This “halfway house,” which he predicts will happen at some point this year, would enable advisors some of the benefits of independence and ownership while remaining under the wirehouse umbrella.

FAs considering making a move should be aware that moving to a non-protocol  firm could bring a potential lawsuit from their previous employer.  No matter the move, FAs should always consider:

1. Are they employed at a protocol firm?
2. Would they be moving to a protocol firm?
3. If they are not moving between protocol firms, what is the likelihood that they will be sued over any restrictive covenants (non-compete - non-solicits) that exist in their contracts?
4. Is the financial upside of new employment going to outweigh the paying potential financial losses of moving to a new firm?
5. Is the new employer in a position to help the FA successfully move their business - are they up for the fight?
6. What does the new employer's employment agreement look like?  Are there more restrictive covenants?  Are they more burdensome? 

These are but a few areas to consider.  As with any employment move, the employee must make a smart decision based on the pros and the cons.  The grass is always greener on the other side of the fence.

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The Case

FINRA recently fined Merrill Lynch $1 million over a Texas Ponzi scheme.  The case, which involved a San Antonio broker who was sentenced to prison was covered in a recent blog post in the Stockbroker Fraud blog. 

The Merrill broker persuaded investors to put money into a partnership and used at one point $1.4 million of those funds for personal spending and to support his house-flipping business.  FINRA alleged that Merrill failed to properly supervise the broker and failed to monitor the accounts that were used to operate the Ponzi scheme. 

The Cause of Action

Texas employers will always have to be aware of a potential cause of action against them for the wrongful or negligent acts of their employees.  The negligent hiring/negligent supervision is a catch-all claim where the Plaintiff alleges that the employer either (1) improperly screened the potential employee during the hiring process; or (2) failed to properly supervise the actions of the employee. 

The latter is very difficult to defend in terms of obtaining a summary judgment because there is always the argument that the employer could have done something a little bit more to prevent some type of damage to the plaintiff.  That said, strong pre-employment screening policies and supervision policies mitigate against these type of claims. 

 

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According to a recent survey, brokers and wealth managers will be on the move during the remainder of 2011 and in 2012. The survey,  entitled “Wealth Management on the Move: The Moment of Truth” notes that there was a significant "buying" of advisors and wealth managers in 2008 and 2009 through retention packages.  These usually took the form of forgivable loans with 3 - 4 year retention periods.  This means  the loans are now forgiven or close to it. 

 

As a result, a lot of brokers are weighing new offers from new firms that include large signing bonuses: 

 

A lot of top brokers will look at the signing bonus being offered, and at how little is left on the retention contract, and they’ll decide it looks like jumping ship is a good deal

 

Brokers need to be sensitive to the risk/reward calculus involved in any employment move.  Things to consider include:  

 

1. The effect of any non-compete or non-solicitation agreement may have on their move to a new employer;
2. The effect of any “garden leave policy” may have on their transition;
3. Whether their new employer is in a position to aggressively help them move their business;
4. The tax implication any bonus or promissory note may have on them individually;
5. How much business might be lost; and
6. The general hassles of moving to a new employer.

The grass is always greener on the other side of the fence.  Any employee should critically evaluate the pro's and con's of a move and consult with counsel if necessary.

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Last year FINRA published its social media guidelines as contained in Regulatory Notice 10-06.  As discussed previously, broker/dealers are subject to very onerous restrictions when it comes to social media communications.  The restrictions are so burdensome it is questionable why a financial advisor would use social media for business purposes beyond general networking.

Morgan Stanley's social media gameplan was profiled in a recent CNBC story.  Brokers will be permitted to use pre-approved messages on Twitter and LinkedIn.  Though some commentators are critical of this type of static and pre-approved communications, large wirehouses simply can't allow representatives to engage in ad hoc product endorsement or discussions.  Such an approach will likely run afoul of FINRA regulations and subject the company to unnecessary exposure.

So, Morgan Stanley will enter the social media fray slowly and others are sure to follow.  The bottom line is financial advisors cannot ignore the popularity of social media sites and opportunities to communicate with prospective and ongoing clients.  Easier said then done in this highly regulated industry.

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A recent survey by Boston-based Alite Group found the following:

• 11,000 wirehouse reps may be on the move;
• 15% are satisfied with their employer;
• 20% are ready to move and would like to do so in the next 2 years;
• 2/3's of those with retention plans in place say there is a chance they'll leave;
• most advisors think they can take half of their existing book of business; and
• only 23% would go independent. 

Brokers with retention plans in place will have to consider the economic impact walking on a retention plan would have in addition to the amount of business they could potentially lose.  Also, making the move from a large wirehouse, which in most instances is a member of the Protocol, to go independent could result in a non-compete or non-solicit lawsuit that could tie up the departing broker in Court or Arbitration and be a financial drain. 

With more and more advisors unhappy with their current wirehouse employer it will be interesting to see if there is actually a significant migration to become independent and what the wirehouse reaction is.  As it stands, wirehouse to wirehouse migration is down but whether advisors are that "unhappy" remains to be seen.

(h/t Howard Stock of the Bank Investment Consultant)

 

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After the financial meltdown there was talk of the Securities and Exchange Commission imposing a fiduciary duty standard on financial advisors and brokers.  That no longer looks like the case and apparently the SEC is only going to "study" the situation.  Why does it matter?  In Texas, a fiduciary-defendant has the burden of proof in a trial.  Below is the question the jury considers on fiduciary duty:

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We've previously discussed  the lucrative compensation packages wire houses use to attract high producing FAs.  The mechanics of those packages usually include a signing bonus, but it's not an up front bonus like the 1st round draft choice in the NFL draft receives.  In many instances it is a forgivable promissory note conditioned on the  broker staying a certain time period.  If they leave early the broker must pay it back.

Recently, Judge Lewis Kaplan of the Southern District of New York dismissed a group of former Citigroup brokers' lawsuit who left employment early and refused to pay off their loans.  Typically, breach of a promissory notes is almost impossible to defend.  It's a simple proposition, I loan you money you have to pay it back.

The Judge was not impressed with the Plaintiffs' case:

These plaintiffs all received substantial interest-free advances when they joined Smith Barney . . . They all promised to repay Smith Barney over terms of years out of their compensation and to repay any unpaid balance if they left the firm ‘for any reason or no reason.’ Having left the firm without repaying everything they owed, they brought this baseless lawsuit in what quite plainly was a studied effort to prevent collection of the debts they owed through the arbitration process.

Brokers should assume that if they are going to sign a note like this, they are going to have to pay it back unless they stay the term of their agreement.  

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Predictions about a slowdown in financial advisor recruiting appear to be premature. Last week, Wells Fargo, which purchased Wachovia, which purchased AG Edwards, announced it was looking to add 1400 financial advisors.  It plans to recruit 400 new advisors and obtain the others from other firms. This comes on the heels of reports that BofA intends to add 2000 advisors.

Movement of established brokers often leads to litigation/arbitration when the parties involved are not members of The Broker Protocol.  Obviously there is no concern when a broker/dealer is hiring a trainee but even when a broker/dealer is a member of the Protocol it may still file suit or compel an arbitration when a competing firm is raiding its employees. 

Most recently, as covered by Mark Astarita of SEClaw.com, Raymond James was hit with a $12.1 million dollar arbitration award in a case involving 20 advisers in 4 branch offices. Wachovia alleged Raymond James raided its branch offices. A copy of the award is available at SECLaw.com. Allegedly, Wachovia lost $5.3 million dollars in production from the departure of the advisors. 

We'll keep an eye on BofA and Wachovia's recruiting efforts. 

 

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From late 2008 through 2009 financial advisors were on the move.  Thousands of brokers left their positions with firms like Merrill Lynch, Wells Fargo and UBS.  Many transitioned to new brokerage houses enticed by lucrative signing bonuses and compensation packages.  Others were simply unsure of ever changing policies and compensation systems that resulted from industry consolidation such as the Merrill/BofA merger.

 

There were non-compete/non-solicitation lawsuits many of which were discussed here.  With the protocol in place, many FAs can transition to new jobs without the fear of a lawsuit.  Nevertheless, moving your business to a new employer is work.  Some clients are loyal to the institution, others simply don't want to move, and the former employer will put a full press on to keep the departing brokers' business once they announce their intentions to leave.

According to a recent Reuters' article , the recruiting seen over the last year will calm down in 2010:

Veteran recruiter Michael King, of Michael King Associates, said movement will slow because so many brokers are now tied to their firms, either with retention plans or because they accepted recruiting packages with long-term commitments.

"The big wave was last year, from the end of '08 through the first half '09. A lot of the people who wanted to move, moved," King said. "And many of the people who have not moved are already under contract."

Companies will still offer lucrative incentives to move, but the pool available to transfer appears to have dried up for now.  Of course, the pool will repopulate after the deals inked in 2009 expire and some brokers look for the best new deal. 
 

 

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Despite indications that it would join The Broker Protocol last year when it acquired Merrill Lynch, BofA has yet do so. The Protocol, which has been frequently discussed in this blog, allows departing brokers/advisors leaving a firm to avoid claims for breach of non-compete or non-solicit agreements.

A Merrill Lynch spokesman has indicated that Merrill is a member of the Protocol and anticipates Bank of America Investment Services will join the Protocol in the future, but there is no date that is certain.

There are approximately 300 members of the Protocol.  As long as Bank of America does not participate it retains the right to sue departing brokers or financial advisors for violation of non-compete or non-solicitation agreements.

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In a recent non-compete decision, Federal District Court Judge Steven Robinson denied an injunction sought by IBM to keep a former vice-president, Steven Johnson, from going to work for Dell.  The court rejected IBM’s contention, that Johnson had access to trade secrets:

The court believes . . . that IBM has overstated its case.  Mr. Johnson does not have the sort of information that is considered quintessential trade secret information ‑‑ detailed technical know-how, formulae, designs, or procedures.

Employers attempting to enforce non-competes in Texas have to ensure that what they are claiming as trade secrets are trade secrets.  With recent Texas Supreme Court opinions in favor of the employer, an employees' chief defense to non-compete enforcement will be to attack whether there is actually a trade secret that gives rise to a non-compete.

 

 

 

 

 

 

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Last week I wrote about Judge William Griesbach’s opinion and order in Smith Barney, Inc. v. Darling, et al. 

 

The Court considered the implications of the  protocol for broker recruiting, to which Smith Barney is a signatory:

 

Under the Protocol, these financial institutions have agreed that, if a financial advisor leaves one signatory or financial institution to join another signatory institution, the latter will have no monetary liability to the former if the departed financial advisor follows the terms of the Protocol and the new firm does not engage in “raiding.” The Protocol permits a financial advisor to leave one firm to join another and the departing financial advisor can take his or her client information including the address, telephone number, email address, and account title of their prior customers. They can also begin immediately to solicit their clients when they join a new firm as long as they do not do so before leaving.

 

The Protocol allows a broker moving from a Protocol Firm to another Protocol Firm (i.e., Smith Barney to Merrill Lynch etc.) to solicit their former clients while the previous employer will try to keep their business - also known as competition. 

 

Robert W. Baird & Co. (the new employer in the Smith Barney case), is not a signatory to the Protocol.  Nevertheless, it argued that Smith Barney's entry into the Protocol is a concession that former employees soliciting their former clients will not cause irreparable harm (a required element for a temporary restraining order). 

 

The Court seemed to believe there was some merit to this argument.  Though Smith Barney will likely continue with their lawsuit, it failed to obtain relief from the Court at the most critical time juncture, when the departing advisor is trying to move his business to his new employer.

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Merrill Lynch and Bank of America appear to have resolved the non-compete issues discussed in my last entry:

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After Bank of America ("BofA") purchased Merrill Lynch it put on the full-court press to keep one of Merrill's most important assets, its brokers. What has resulted is "The Advisor Transition Program ("ATP")", which provides financial incentives for brokers who remain following the merger. Reportedly, if a broker leaves during the seven year term of the ATP, he or she has to return all customer information and records and can be enjoined from disclosing such records. This provision has raised some questions.

Merrill and other large brokerage houses are members of the Protocol for Broker Recruiting (the "Protocol"). A district court in Iowa recently described the Protocol as an agreement between signatories that allows for "reciprocal 'poaching' of registered representatives and the registered representative's clients from the former firm, apparently on the assumption that they will gain as much as they lose in the exchange." Though a broker's employment agreement, at Merrill for example, may contain a non-disclosure, Merrill had essentially agreed not to enforce the provision as long as the departing broker moved to another Protocol member.

So when BofA took over, the question became whether it intended to enforce the terms of the non-disclosure contained in the ATP? Merrill stated last week, "The Advisor Transition Program does not change any of the rights or obligations that exist for our financial advisors under the [Protocol]. It has no impact on the Protocol. Suggestions to the contrary are likely the product of those who want to recruit our financial advisors to other firms."

So the answer for now appears to be that the Protocol is alive and well at Merrill. Nevertheless, as a non-signatory of the Protocol, BofA could potentially still enforce a non-compete or non-disclosure. The enforceability of the non-disclosure in the ATP will vary from state to state and what BofA will do on down the road remains to be seen. Today's news indicates that many brokers are unhappy with the ATP's financial incentives.

Disclaimer

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