In the battle to retain clients, broker-dealer firms have in their arsenal non-solicitation agreements they can whip out when brokers are fired or bolt. But new guidance issued by Finra may have just given these brokers a new weapon to help them take their clients with them.
Last week, Finra issued seemingly straightforward guidance on customer communications related to departing registered representatives.
Finra says in the guidance it expects broker-dealer firms to “promptly and clearly communicate” to customers how their accounts will continue to be serviced after a registered representative departs. And the self-regulator expects the firms to give customers “timely and complete answers, if known” when the customer asks questions about a departing broker. Broker-dealer firms must also “communicate clearly and without obfuscation” when asked questions by customers about the departing registered representative.
The ramifications for brokers breaking away from their firms could be huge, lawyers believe.
The guidance helps provide transparency to a murky issue – who has the right to retain a client, according to Erwin Shustak, San Diego-based managing partner at law firm Shustak Reynolds & Partners.
Shustak, who has clients on both sides – firms and brokers – of contract dispute arbitration and litigation, believes the guidance may have been in response to “problems brokers face” when their departure from a firm is sudden or contentious.
“As soon as a broker leaves, they can be subject to big abuses,” Shustak says.
Some broker-dealer firms are only too eager to divvy up the client assets previously serviced by the departing broker, and it’s not unusual for the firms or remaining registered representatives to tell lies about the circumstances of the broker’s departure, Shustak says.
The potential information firms must share with customers includes:
- Clarification that the customer can choose to either retain assets at the firm and be serviced by a newly assigned registered representative, or transfer the assets to another firm.
- Reasonable contact information – such as the phone number, email address or mailing address – of the departing representative, provided the registered representative has consented to the disclosure.
“At the very least, it should cut down on some of the shenanigans that can occur,” says Dennis Concilla, Columbus, Ohio-based head of Carlile, Patchen & Murphy’s securities litigation and regulation practice group. “I can’t count the times when a customer was told their advisor left under mysterious circumstances or simply disappeared.”
Even for brokers from signatories of the Protocol for Broker Recruiting, exits can be challenging and transitioning clients to a new firm can be full of roadblocks — as evidenced by a flood of motions for temporary restraining orders against departing brokers filed in court by broker-dealers over the years. Firms that file these TROs typically argue breach of non-solicitation agreements, breach of employment contracts, trade secret violations and unfair competition.
Although a Finra guidance doesn’t have the strength of a rule, it can be used as a weapon in arbitration or court by a departing broker who is blocked from reaching out to clients for whatever reason, says Shustak.
If somebody can show, for example, that the firm didn’t share the contact information of the departing broker or if the firm lies about the reason a broker was fired or left, then the departing broker can use this guidance to show the firm violated Finra policy. The evidence of a violation can be used to argue in arbitration or in court that access should be given to clients, Shustak says.
“It makes it a stronger cause of action [for the departing broker], because a Finra guidance is considered a policy at all times,” Shustak says.
But Shustak doesn’t expect a firm’s failure to comply with the guidance to lead to sweeping Finra enforcement action against a firm — “unless a firm consistently fails to enforce this and it gets to the attention of Finra.” Even then, enforcement action would seem like a long shot because “it would take a lot of complaints and hard proof,” he says.
“I think this guidance is basically to reiterate the fact that the clients are independent and can make a decision as to whether to follow the departing broker or stay with the firm,” Shustak says.
Finra guidance notices are intended to help member firms understand how to address particular rules or situations, says a spokeswoman from the self-regulator.
The spokeswoman says this particular guidance is conveying Finra’s expectations of how member firms should communicate with customers when they have a registered representative who has left the firm.
“Part of treating a customer fairly is responding to the customer’s questions that involve the choice of where to maintain his or her assets,” she says.
As with any conduct not addressed by a specific Finra rule, if there are issues with customer communications that may require enforcement action, the self-regulator would turn to Rule 2010 – or Standards of Commercial Honor and Principles of Trade – as the basis for any action.
The spokeswoman says Finra believes “the vast majority” of member-firms are already acting consistently with this guidance.
“This is just to make sure that customers are able to make informed choices — that customers will have the information they need so they can decide what to do with their assets at the firm,” she says.
Thomas Potter III, a partner at law firm Burr & Forman in Nashville, Tenn. who has represented firms and brokers in disputes over client accounts, agrees the guidance “reiterates best practices followed by most of the industry.”
“Most firms and registered reps are more interested in getting or keeping an investor’s business than they are in getting back at the departed rep,” Potter says. “And you don’t get or keep a customer’s business by keeping them in the dark.”
Finra’s latest guidance isn’t taking a stance on the ownership of the clients or of the assets, the self-regulator's spokeswoman says, reiterating previous comments.
But Shirl Penney, president and CEO of RIA network Dynasty Financial Partners, which targets breakaway brokers, believes the guidance is a “net positive” for departing brokers.
“It suggests that the firm they are leaving should act professionally when discussing the client’s former advisor and, if the client asks and it has been provided by the departing advisor, that the client should be provided with the contact information of the advisor at their new home,” Penney says.
“This seems to be a good clarification to benefit a client who may be caught off guard with the advisor departure, given rules around the broker protocol that often prevent the advisor from telling a client about a pending move in advance,” he adds.
The Finra guidance doesn’t prescribe hard deadlines for the customer communications. For example, there is no strict definition of the word “promptly” in terms of hours or days. But there is a reasonableness component — and in Finra guidance lingo, this is generally interpreted to mean without undue delay.