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Is it Auld Lang Syne for the Transitioning Advisor?

January 25, 2018

Despite some widespread hysteria, it actually has been a happy new year for the advisor contemplating a transition. The options and opportunities for advisors are more varied and greater than ever before.

Morgan Stanley’s and UBS’s departures from the Protocol for Broker Recruiting have (unfortunately) been the cause of misplaced fear in the financial services industry. Much in the way that few people seem to know the lyrics to or the meaning of the New Year’s Eve classic "Auld Lang Syne," yet embrace it anyway, the legal implications concerning non-Protocol transitions are regularly discussed but rarely understood.

Many advisors have caught the fear bug and are concerned that should they depart from non-Protocol firms they will most certainly find themselves at the other end of a lawsuit. That thought process is deeply flawed. Legal actions are not the exclusive domain of non-Protocol firms. Indeed, Protocol firms themselves file legal actions against advisors who violate the terms and conditions of the Protocol or such respective firms’ contractual provisions or policies and procedures.

The Protocol permits an advisor to take certain limited and specific client information from one Protocol firm to another, if certain steps are followed. Otherwise, advisors are generally prohibited from taking any firm documents or information. Additionally, the Protocol, when applicable, relieves certain contractual prohibitions against soliciting clients post-departure. That is all the Protocol does. It does not potentially relieve advisors of any other obligations or duties.

Since Morgan Stanley’s and UBS’s respective exits from the Protocol, the authors are only aware of a handful of court actions that have been filed - all by Morgan Stanley.

In the first three actions filed after Morgan Stanley’s Protocol departure, if the allegations made by Morgan Stanley in those actions were true, Morgan Stanley would have had grounds to file court actions against those advisors even if it were still a Protocol firm.

In the first action, filed in Florida state court, Morgan Stanley supplied affidavits alleging that prior to departure the transitioning advisor printed out a 14-page list containing client contact information and sent a list of 200 clients and prospects to his personal email prior to resigning. Moreover, the advisor transitioned to a non-Protocol firm. Indeed, if true, even if Morgan Stanley had remained in the Protocol, it would have had a legitimate basis to seek judicial intervention against the advisor. The advisor stipulated to an injunction.

The second court action Morgan Stanley filed was in the U.S. District Court for the District of New Jersey. In that action the advisor, similar to the Florida state court action, transitioned from Morgan Stanley, a then non-Protocol firm, to another non-Protocol firm. Notwithstanding those facts, the advisor admitted to taking a list of client contact information akin to a Protocol list plus facsimile numbers. Not surprisingly, the court granted a temporary restraining order.

In the third court action, Morgan Stanley filed an application in the U.S. District Court for the Northern District of Illinois for a temporary restraining order against an advisor. It alleged that on the day of his resignation, the advisor emailed to his personal email a document containing over 100 client identities, account numbers, and asset information. The advisor stipulated to a temporary restraining order that was so ordered by the court. Even if the advisor had transitioned to a Protocol firm -- which he did not - and the advisor actually engaged in the alleged conduct, Morgan Stanley would have had a proper basis to seek a temporary restraining order regardless of its Protocol status.

In these three actions, the advisors allegedly (or admittedly) took information or engaged in activities beyond what would have been protected by the Protocol. Such circumstances would have likely resulted in lawsuits regardless of whether Morgan Stanley was in or out of the Protocol.

In subsequently filed actions, the authors are informed that Morgan Stanley was unsuccessful in obtaining a court order that the advisors at issue had to cease contacting clients and another action is currently pending. On January 23, 2018, Morgan Stanley obtained a temporary restraining order against an advisor based on, in part, allegations that he transmitted confidential information outside of Morgan Stanley’s servers. If the allegations were true, Morgan Stanley would have had grounds to obtain a temporary restraining order even when it was still a Protocol firm.

Successful non-Protocol transitions, without any legal actions filed, frequently occur and will continue to occur in the present environment. It is likely, however, that you will not hear as much about the successful departures.

When advisors avail themselves of experienced counsel prior to their transitions, do not take information or documents belonging to the firms from which they are departing, and follow a disciplined and appropriate process, they set themselves up for a successful transition of their business and reduce the likelihood of legal issues.

The phrase "auld lang syne" roughly translates to "days gone by." Protocol transitions may be in the rearview mirror for certain advisors, but there is no reason to lament what once was. There is a bright future for those who are counseled appropriately, make informed decisions, and act prudently.

This opinion was coauthored by Jonathan R. Morris, chief legal and governance officer, Dynasty Financial Partners.