The legal protection financial advisors can expect from their firm is something FAs should take seriously, specialists and industry executives say.
Earlier this month, Craig Price, an ex-UBS financial advisor who won a $650,000 arbitration award for defamation, told FA-IQ that he was disappointed that he hadn’t received the payment at the time. Price was chasing the payment from the wirehouse even if his arbitration case before the Financial Industry Regulatory Authority had named UBS advisors Raymond Klahne and William Gilcher as the respondents. This week, Price said his attorney’s office has the payment from UBS.
Not every firm is going to pay for an arbitration or lawsuit award like UBS did for Klahne and Gilcher, and even if they do, they may do it on a case-by-case basis, according to sources.
The legal protection or indemnification personnel are entitled to from their firms is largely a function of the terms of their contracts and state law corporate indemnification statutes, according to Gregg Breitbart, co-managing partner of law firm Kaufman Dolowich Voluck.
“Absent a contractual or statutory basis, I’m not aware of any ‘common law’ requirement that a firm [must] indemnify an employee for actions taken within the scope of their employment,” Breitbart said. “In fact, I much more frequently see the contractual indemnification obligation flowing from the employee to the firm, especially where the employee is a producing rep.”
Noby Powell, a managing director and practice leader at Asset Management Insurance, a division of insurance agency Maury Donnelly & Parr, says contract details are key.
“When there’s a 1099 relationship, there will be a contract and the indemnification needs to be in that contract,” Powell said. “You want to make sure there’s an indemnification provision in your contract with your employer that stipulates that the employer indemnifies you for any expenses you incur on behalf of your services to the firm.”
Powell notes, however, that not all FAs get contracts.
“It could be an employee-at-will situation,” Powell said, adding that those FAs should pay close attention to the firm’s bylaws. “They [would] want to confirm that there is indemnification within the company’s bylaws and/or managing membership agreement, if it’s an LLC.”
Additionally, many firms will purchase errors and omissions insurance which ensures that clients can be reimbursed in the event of a problem, according to Powell.
“The FA should look for the errors and omissions from the employer,” Powell said, adding that advisors should ask to see a copy of the certificate.
Even when firms decide to settle a customer complaint, FAs should be cautious, according to Jeff Nash, chief executive officer of recruiting firm Bridgemark Strategies.
“Most advisors assume that the firm is trying to settle the complaint to the advisor and firm’s interest … The reality is that the lawyers that are hired are looking to resolve the matter for the benefit of the person paying the lawyer’s fees,” Nash said.
“If the firm is paying the lawyer’s fees, then lawyers are working primarily on behalf of that entity with a secondary consideration of the other parties,” Nash added. “This is how it plays out.”
Nash says negotiating indemnification tends to be challenging for many advisors.
“The ability for an advisor to negotiate some form of indemnity on joining a larger [broker-dealer] will likely be near impossible,” Nash said. “Firms are going to have their standard contracts.”
John Pierce, head of business development at Cetera Financial, says that it is not his firm’s policy to indemnify financial professionals. However, Pierce notes that larger broker-dealers such as Cetera are better equipped to deal with legal issues than their smaller counterparts.
“That’s also one of the reasons why some smaller broker-dealers and RIAs are struggling to compete — they can’t withstand a large loss, because they don’t have the capital requirements,” Pierce said. “You don’t want to be affiliated with an ill-equipped broker-dealer or RIA — you want to be affiliated with a firm that you can grow with and be protected.”
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