Finra isn’t going to intervene in the "who-owns-the-customer" debate that’s resurfaced in the financial advisory industry because of the three high-profile exits of Morgan Stanley, UBS and Citigroup from the Protocol for Broker Recruiting.
The broker protocol “is an agreement between the firms, so Finra is not part of it,” a Finra spokeswoman tells FA-IQ in reaction to suggestions received by the publication about the regulator’s role in defining who owns the customer – the broker-dealer firms or the advisors.
The spokeswoman adds that Finra doesn’t have a position on this particular debate.
FA-IQ’s straw poll of advisors shows 91% believe they themselves own the customers, their account information and the right to service their assets. The rest believe the firm owns them.
Bill Singer, a lawyer who is of counsel at Gusrae Kaplan Nusbaum, believes Finra should intervene, echoing comments from other lawyers and advisors.
“Finra needs to convene an industry conference to finally be able to decide on what’s a workable definition of who owns the customer,” he says. “There’s got to be a better way of doing this than TROs and arbitration.”
The broker protocol was created in 2004 to help cut down the number of lawsuits and arbitration cases filed by broker-dealers because of advisors changing firms.
The pact lets registered representatives who move from one firm to another – as long as both firms are signatories to the broker protocol – take the following account information: client name, address, phone number, email address, and account title of the clients they serviced while at the firm – and nothing more.
The pact also lets registered representatives who comply with the agreement solicit customers they serviced while at their former firms – but only after they have joined their new firms.
Richard Berry, director of Finra’s Office of Dispute Resolution, notes the self-regulator has rules in arbitration, “but the rest would be firms coming into agreement.”
He points to Finra Rule 13804, entitled “Temporary Injunctive Orders; Requests for Permanent Injunctive Relief.”
This rule states parties may seek a temporary injunctive order from a court in industry or clearing disputes required to be submitted to arbitration. It also states that upon a court issuing a temporary injunctive order, an arbitration hearing on the request for permanent injunctive relief will begin within 15 days.
In terms of a rule related to defining who owns the customer, the Finra spokeswoman says the closest would be the SEC’s Regulation S-P. “In terms of the rule that already exists, that’s the rule,” she says.
Finra says the protection of financial and personal customer information is a key responsibility and obligation of Finra-member firms.
Under Regulation S-P, firms are required to have policies and procedures addressing the protection of customer information and records. This includes protecting against any anticipated threats or hazards to the security or integrity of customer records and information and against unauthorized access to or use of customer records or information. The rule also requires firms to provide initial and annual privacy notices to customers describing information-sharing policies and informing customers of their rights.
Although those protections are more related to privacy issues, broker-dealer firms have used claims of the misappropriation of customer information in their lawsuits against advisors who left their firms.
In a motion for a TRO and preliminary injunction filed in December by Morgan Stanley versus its former advisor John Louis Fitzgerald before the U.S. District Court for the District of New Jersey, the wirehouse specifically cited Regulation S-P in one of its arguments, saying the rule requires it to safeguard customer information, which is “deemed confidential and protected from disclosure.”
Morgan Stanley also asserted that its customer records are trade secrets protected under the New Jersey Trade Secrets Act.
In his filing to oppose Morgan Stanley’s TRO and preliminary injunction motion, Fitzgerald’s lawyers argued their client owns the customer information because he 100% developed the clients and wasn’t assigned any clients by the wirehouse.
In a TRO filed in June by UBS against its former advisors led by Phil Fiore, the wirehouse also argued that the customer information was confidential and its use by the defendants is in violation of the Connecticut Uniform Trade Secrets Act.
The TRO motion of Morgan Stanley was granted and a preliminary injunction hearing was set for January 9. The TRO motion of UBS was denied. Separately, both cases are currently in Finra arbitration proceedings.