Good news for brokers planning to change jobs: Their employers can no longer freeze the accounts of clients who want to follow them to their new firm. The bad news, however, is that defectors still face landmines when trying to transfer clients' investments from one brokerage to another.
In December, the NASD ruled that firms can no longer obtain temporary restraining orders (TROs) to block customer account transfers. “It's a fundamental right of an investor to choose with whom he or she does business,” says Robert R. Glauber, NASD chief executive. The SEC accepted the ruling when it was filed in late December.
“This is a clear victory for brokers and customers,” says Jim Eccleston, an attorney with Eccleston & Associates in Chicago. As a result of this same rule interpretation, brokers now only need an oral indication from their clients — and not a signed ACAT form, which had been the only legal way to get an account's assets physically transferred.
“Once a client decides which side they're taking — the broker or the firm — the NASD rule kicks in, the broker is in the clear and the firm can't seek to stop the transfer,” says Bill Jacobson, of Kaplan & Jacobson in Providence, R.I. “So what you're going to see now is an even greater rush for the broker to contact the client because once they say ‘I want to transfer,’ the rule is clear, the account must be transferred.”
But beware. Brokerage firms can still get TROs against employees who defect to a competitor under certain circumstances, says the NASD. How? If a rep has signed a “non-solicitation” agreement as part of his contract, for example, then the brokerage can still get a TRO that prevents him from contacting his clients.
Jacobson claims firms can still “effectively evade” disciplinary action under the NASD's new rule. “Firms will argue that while they can't seek an injunction that explicitly holds up the transfer process, they will try to get ‘broad’ injunctions against the broker contacting the client,” he says. “The firms will create a scenario where the broker has limited, if any contact at all, with clients.”
Moreover, firms that intend to sue a broker may also try to recoup the losses of the transferred account in the punitive phase of the court decision, says Eccleston.
Indeed, brokerages intend to use all available legal tools at their disposal. “We are going to continue to take steps to protect confidential information of our clients and ensure that employment agreements are honored,” says a Merrill Lynch spokesman. “The recent regulatory action only limits efforts to transfer client accounts. Firms still will have the right to prevent improper solicitation from occurring and to seek and receive damages as a result of those improper solicitations.”
Brokers have no illusion that the December ruling will change the balance of power. Several who where interviewed for this article say they expect firms to step up their efforts to get reps to sign employment agreements that prohibit them from taking clients with them if they switch firms. And anyway, says one New York broker, “Firms still have all kinds of tricks to hassle you. If they want your client bad enough, they still can send another broker after him. And they can offer reduced fees, free trades, non-interest margin loans, all kinds of stuff.”
Employment contracts, already popular, will likely become more so, even for trainees. “Training contracts for someone just entering the business will likely be required,” says a UBS PaineWebber broker located in the West. “And if that broker should leave after a certain length of time, the broker will have to reimburse the firm.”
Most firms' training and employment contracts already contain such a provision.
An East Coast-based Prudential rep says, “I think this ruling will result in more movement [by brokers], but it won't result in a major net change for the firm.”
Resolution of the TRO controversy began last year when state regulators became concerned. After Utah took action against Salomon Smith Barney over its refusal to transfer accounts to a broker who switched to Prudential Securities, the North American Securities Administrators Association's broker-dealer section began investigating whether firms in other states were involved in similar behavior. They found that other firms were, says Ralph Lambiase, Connecticut's director of securities, an NASAA member.
Once NASD member firms heard what was happening, a few firms, including Merrill Lynch and Morgan Stanley, swore off using the courts to freeze client accounts.
“All we [state regulators] care about is making sure customer accounts are no longer held hostage while the firm and agent battle it out,” Lambiase says. “Just the fact that the client was in the middle of this thing was wrong. The practice was totally unethical and the states won't stand for it.”
10 Years ago in Registered Rep
“A mutual fund broker/dealer sometimes can operate with expenses as low as $10,000 to $20,000 a year, so $100,000 of business could make it worthwhile to establish” your own firm.
— Ed Mungenast of Securities Consultants Inc.