The Big Deal with Brokers and Fiduciary Duties

Posted on May 18, 2010 by Rob Radcliff

 

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:

Did Mr. Broker comply with his fiduciary duty to Mr. Customer?

Because a relationship of trust and confidence existed between them Mr. Broker owed Mr. Customer a fiduciary duty.

To prove he complied with his duty, Mr. Broker must show:

a.     The transaction[s] in question [was/were] fair and equitable to Mr. Customer;

b.     Mr. Broker made reasonable use of the confidence that Mr. Customer placed in him;

c.     Mr. Broker acted in the utmost good faith and exercised the most scrupulous honesty toward Mr. Customer;

d.     Mr. Broker placed the interests of Mr. Customer before his own, did not use the advantage of her position to gain any benefit for himself at the expense of Mr. Broker, and did not place himself in any position where his self-interest might conflict with her obligations as a fiduciary; and

e.     Mr. Broker  fully and fairly disclosed all important information to Mr. Customer concerning the transaction[s]. 

      Answer: _______________

 

In most civil cases, the burden of proof is on the Plaintiff. Not in a fiduciary duty case where the defendant has the burden. Though the majority of broker/dealer disputes take place in the arbitration format, a proceeding in state court would have a far different complexion if fiduciary duties are imposed, not to mention the effect it would have on the broker/customer relationship.

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Brokers have to pay bonuses back.

Posted on May 3, 2010 by Rob Radcliff

                                               

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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Are the broker recruiting wars over?

Posted on January 26, 2010 by Rob Radcliff

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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Non-Solicitation TRO Denied in Broker Case

Posted on June 19, 2009 by Rob Radcliff
 

Judge William C. Griesbach, of the Eastern District of Wisconsin, recently denied a request for a temporary restraining order filed by Smith Barney against several departing brokers and their new employer, Robert W. Baird & Co.  Smith Barney sought a TRO in conjunction with Rule 13804 of the FINRA Code of Arbitration Procedure, meaning entry of a TRO by the district court would have triggered an arbitration within 15 days. 

 

The non-solicitation provision provided that the departing brokers would not:

solicit by mail, by phone, by personal meeting or by any other means, either directly or indirectly, any Account whom I served or whose name became known to me during my employment at Smith Barney in any office and in any capacity.  My agreement "not to solicit" means that I will not "during my employment and for a period of one year thereafter, initiate any contact or communication, of any kind whatsoever, for the purpose of inviting, encouraging or requesting any Account:

a) to transfer from Smith Barney to me or to my new employer, or b) to open a new account with me or with my new employer, or c) to otherwise discontinue its patronage and business relationship with Smith Barney

The Court ruled that the provision was overly broad and invalid under Wisconsin law because, among other things,  "it would prevent the financial advisor from contacting even individuals with whom he'd had no prior contact". 

Smith Barney stated it was considering its options following the ruling.

 

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