Issues For Registered Reps Changing Firms

At some point in their career, most registered reps consider moving from one firm to another. It might be the lure of an upfront loan or bonus, an improved payout, a bigger name, or maybe just a change of scenery. Whatever the reason, it is not a decision that should be taken lightly and without some careful planning. Do it wrong and you may find yourself subject to a court order preventing you from earning a living and servicing your clients. You could wind up embroiled in costly litigation or arbitration and might eventually have to pay damages. But these things can also be avoided. Some preparation and knowledge of the applicable legal principles can help you make a smooth transition to greener pastures. The outcome will always depend on the specific facts and circumstance of your situation, as well as the particular law of the state that would apply to you, but below are some general principles to keep in mind.

The Duty of Loyalty

All employees owe a fiduciary duty of loyalty to their employer. That doesn’t mean that that you’re stuck with the same firm for life. In fact, you can prepare to leave and compete with your soon-to-be former employer while you’re still working there. However, you can’t do it using your employers’ resources. Don’t do it during work hours, on your work computer or on your work phone. Not only are that computer and phone your employer’s resources, they also create a trail of evidence that your employer can easily find and use against you.

Confidential Information

Broker/Dealers take great pains to gather and protect information about their customers. The use of such information by recently departed registered reps is often the subject of litigation. Take a look at your employment agreement, your written supervisory procedures, your continuing education materials and any other agreements, documents or paperwork you may have signed or acknowledged during your time with your firm. If you don’t already have your own file with all of that paperwork, you should create one. Somewhere within those documents, your firm probably attempts to characterize certain information as confidential and restrict the ability for anyone to disseminate or use this information, sometimes indefinitely. Some Broker/Dealers and RIA’s are party to an agreement known as the Protocol for Broker Recruitment (the “Protocol”). This agreement allows brokers moving from one Protocol firm to another to take certain information with them as they leave that might otherwise be considered confidential. It is important that the procedure set forth in the Protocol be fully complied with in order to reap its benefits. A lawyer can help guide you through its requirements.

Putting the Protocol aside, generally, customer lists themselves are not entitled to legal protection. More detailed information, such as the particular preferences and financial circumstances of individual customers is more likely to receive protection from a court or arbitration panel, i.e., you won’t be permitted to take it with you, or you could be penalized for already having done so. Regardless of whether the information is or is not truly confidential information that belongs to the firm, courts and arbitrators will likely take a negative view of any conduct that looks like some kind of wrongful misappropriation, such as e-mailing documents from work to your personal e-mail address, or taking home or copying documents that are supposed to physically stay at the firm.

Restrictive Covenants

Chances are, at some point, you became subject to a restrictive covenant- an agreement or a part of an agreement that restricts your ability to compete with your soon-to-be former employer in some way. Like a confidentiality agreement, a restrictive covenant may be in your employment agreement, or it may be separate. Sometimes, restrictive covenants are entered into in connection with a promotion or participation in a new compensation structure. Generally, the law in most states is somewhat hostile to restrictive covenants. They are scrutinized by courts to make sure that their anti-competitive effect isn’t too strong. Moreover, the law implicitly recognizes something resembling a right to earn a living. Moreover, FINRA rules protect a customer's ability to deal with the broker or advisor of their choice and transfer his or her account freely, so a restrictive covenant that point-blank says you may not service certain customers under any circumstances would be impermissible. In fact, FINRA Rule 2140 specifically prevents firms from interfering with the transfer of customer accounts in the context of an employment dispute between a broker and his firm.

Employers often overreach and attempt to use overly oppressive restrictive covenants, but courts and arbitrators will not necessarily disregard them entirely. In New York, courts will pare down the overreaching and oppressive portions of a restrictive covenant but leave enough intact to protect an employer’s legitimate business interests. New York courts have held that those legitimate business interests can include the good will established between the firm and its customers, through the efforts of an employee who is departing the firm.

In most states the law requires that a restrictive covenant must be reasonable in geographic scope and time frame. While the outcome will always depend on the specific facts of each case, and the law of the state that applies to your situation, it is generally a safe bet that a court will uphold a restrictive covenant that prevents you from directly soliciting customers that you first serviced and developed while you were at the firm for about a year- sometimes longer, sometimes shorter. Check with your lawyer. Customers that were yours before you were at the firm will be fair game for competition, and customers that you didn't service at your old firm, even if someone else there serviced their account, can also be fair game for solicitation.

Restrictive covenants aren’t limited just to competition for customers. Your firm may also try to limit your ability to recruit their employees to come join your new firm. Again, certain aspects of these agreements may be valid and others invalid. Usually, the safest course of action is to avoid this sort of activity altogether. If you are going to try to recruit your former colleagues, certainly do not do it by sending them e-mail to their work e-mail address, which is most likely monitored. That won’t help you or them. Same goes for the telephone. If you stay in touch with former colleagues who express an interest in moving, discuss it with counsel or your branch manager or other supervisor before you act.

Also consider whether the new firm that you’re moving to is aware of any restrictive covenants to which you may be subject. Has the new firm’s legal counsel or your new supervisor reviewed your employment agreement with your old firm? Have they discussed whether they’re willing to indemnify you or defend you in the event that your old firm takes legal action against you? Do you or does your new firm have an expectation that your customers from your old firm will follow you to your new firm? Your new firm probably doesn’t want to be pulled into a fight with your old firm and you don’t want to risk making two enemies instead of just one.

Giving Notice

Look at your employment agreement and all other relevant paperwork to determine if there a particular procedure or time-frame is required for giving notice. Sometimes it might be safe to ignore these procedures, whereas under other circumstances they should be strictly complied with. Review the relevant documents with your lawyer. If you eventually find yourself in litigation over your departure and you disregarded the notice procedure or the amount of advance time that your employment agreement called for, the firm will argue that it deprived them of the opportunity to transition your accounts to new representatives. Moreover, leaving quickly, with little warning, just might not sit well with an arbitration panel. If there is a chance that you’ll wind up in arbitration or litigation, you’re going to want to have done little things that will make you look a good guy, rather than like someone who snuck out in the middle of the night and set up shop somewhere else before anyone noticed.

Other Issues

• Do you have any outstanding loan balances with your firm? Usually, the remaining balance on a forgivable loan will become immediately due upon your leaving the firm.

• Does the firm owe you any commissions or will the firm owe you commissions at the time you leave? Under New York law, a firm may not withhold commissions that you earned prior to leaving, even if you were not there at the time the firm usually pays out the commissions. At the same time, when exactly a commission has been earned and you become entitled to receive it is not always a clear question.

• Make sure you have the relevant documentation and a good handle on whatever monies your firm owes you or that you owe the firm.


With careful planning and an understanding of all the attendant risks and obligations a move to a new firm can be smooth and painless. If done hastily and without planning, it can be a difficult experience that can damage your reputation and significantly impact your earnings. Give yourself plenty of time to execute a move, review your employment agreement and all other relevant paperwork you’ve signed or acknowledged during your time at your firm, and seek appropriate guidance.

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