Leaving a broker-dealer to join another firm or go independent can be a significant move for any financial advisor. However, this transition may not always be smooth, especially if the original broker-dealer decides to take legal action over the advisor’s book of business. Understanding what to expect in such situations is crucial for any advisor considering a change. Here’s a comprehensive overview:
Understanding the Legal Landscape
When a financial advisor leaves their broker-dealer, the firm might claim ownership over the client list or book of business the advisor developed while employed. The broker-dealer may argue that these clients are proprietary to the firm and that the advisor has a contractual or fiduciary obligation not to solicit them after departure.
Non-Solicitation Agreements in California
Under California law, non-solicitation agreements are generally unenforceable. This is primarily due to the state’s strong public policy favoring employee mobility and competition.
California Business and Professions Code Section 16600
“Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”
This statute clearly states that non-compete and non-solicitation clauses that restrain an individual’s ability to work are generally considered void in California.
Client Choice and Independent Contact
Clients in California have the right to choose their advisors, and advisors can respond to client-initiated contact.
Case Law
Edwards v. Arthur Andersen LLP, 44 Cal. 4th 937 (2008): The California Supreme Court ruled that non-competition agreements, including non-solicitation clauses, are void under Section 16600. The court upheld that any contractual provision that restrains someone from engaging in their profession, trade, or business is void unless it falls within a statutory exception.
Using Publicly Available Information
Advisors should not use proprietary information from their former employer, but they can use publicly available information and client details they have lawfully retained.
California Civil Code Section 3426.1
“Trade secret means information, including a formula, pattern, compilation, program, device, method, technique, or process, that:
(1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and
(2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”
Protocol for Broker Recruiting
Adhering to the Protocol for Broker Recruiting can provide a structured and legally defensible way to transition clients.
Key Guidelines
The Protocol allows advisors to take limited client information when transitioning, such as names, addresses, phone numbers, email addresses, and account titles, provided they follow specific steps and the new firm is a protocol member.
Legal Proceedings: What to Expect
If your former broker-dealer decides to pursue legal action, it can manifest in several ways:
Cease and Desist Letters
The initial step often involves a cease-and-desist letter demanding that you stop contacting former clients and possibly return any confidential information.
Temporary Restraining Orders (TROs)
The broker-dealer may seek a TRO to prevent you from soliciting clients until a court hearing can determine the case’s merits.
Lawsuits and Arbitration
If the dispute escalates, it could lead to a lawsuit or, more commonly in the financial industry, arbitration through organizations like the Financial Industry Regulatory Authority (FINRA).
Potential Consequences
The consequences of losing a legal battle over your book of business can be severe, including:
- Financial Penalties: You may be required to pay damages to your former broker-dealer.
- Injunctions: Courts may issue injunctions preventing you from contacting former clients.
- Reputational Damage: Legal disputes can tarnish your professional reputation, challenging building trust with new clients.
Strategies to Mitigate Risks
To minimize the risk of legal action when transitioning:
Review Employment Contracts
Thoroughly review your current employment contract to understand any restrictive covenants. Consulting with a legal professional specializing in employment law can provide clarity.
Protocol Adherence
If your current and prospective firms are signatories to the Protocol for Broker Recruiting, follow the guidelines meticulously.
Client Communication
Be mindful of how you communicate with your clients during the transition. Avoid soliciting clients until you have legal clearance to do so.
Documentation
Keep detailed records of all client interactions and ensure you have explicit client consent before transferring their accounts.
Seek Legal Counsel
It is crucial to consult an attorney with expertise in securities law and broker-dealer transitions. They can help navigate the complexities of non-compete agreements, non-solicitation clauses, and the Protocol for Broker Recruiting.
Educate Clients
Advisors can educate clients about their right to choose advisors and provide guidance on transferring their accounts. This education should be neutral and informative rather than solicitous.
Social Media and Public Announcements
Social media and public announcements to share news about your career move can be effective. These platforms allow you to inform a broad audience without directly soliciting any specific client.
Establishing a Transition Plan
Work with your new firm to develop a transition plan that adheres to legal standards. This plan should include how to communicate with clients, handle client inquiries, and transfer accounts in a compliant manner.
Conclusion
Navigating client transitions under California’s non-solicitation laws requires careful planning and adherence to legal guidelines. By understanding your contract, following the Protocol for Broker Recruiting if applicable, avoiding the use of proprietary information, and seeking legal counsel, you can make a smoother and legally compliant transition. Remember, the key is to respect the legal framework while ensuring clients are informed of their rights and options.