As recently reported, a $7-million Morgan Stanley advisor team was discharged from their employment in connection with allegations of logging into client retirement accounts and purportedly rendering investment advice for accounts held outside the firm. Despite having their clients’ authorizations to do so, according to the team members’ BrokerCheck reports as dislclosed through FINRA, Morgan Stanley nevertheless regarded their “advising clients on retirement accounts held away from the firm” as a serious infraction. Morgan Stanley is currently reviewing the matter internally.

As reported, the three-member team has landed at Stifel, Nicolaus & Co., shortly following their voluntarily resignation from Morgan Stanley. If nothing else, this matter should serve as a cautionary tale to financial advisors, including those who may be transitioning or thinking about a transition to another broker-dealer.

According to publicly available information, the Morgan Stanley advisors used certain of their clients’ credentials to access those clients’ non-Morgan Stanley accounts. Specifically, according to some clients own statements, the advisors were providing “limited advice on a non-compensated basis to a few existing and potential clients on their company 401Ks”, that the clients were directly involved, and moreover, had no complaints.

Nevertheless, these seemingly innocuous actions triggered an immediate response from Morgan Stanley, likely in recognition of any potential violations of prevailing privacy regulations or internal firm procedures. In correspondence sent to the clients after some of the team members were placed on leave of absence, Morgan Stanley reminded the individuals of “maintaining the security about your account information” and advised that personal information such as usernames and passwords for online accounts should not be shared with others, including financial advisors.

SEC Regulation S-P requires registered broker-dealers, investment companies, and registered investment advisers (RIAs) to adopt written policies and procedures addressing the protection of customer records and information, often by way of administrative, technical, and physical safeguards. A firm’s written policies and procedures should ensure security and confidentiality, protect against any pertinent threats, and protect against potentially harmful and unauthorized access to customer information. Regulation S-P is of particular importance when an advisor is transitioning or plans to transition to another firm. Any perceived privacy breach could rise to the level of a regulatory violation, and therefore, trigger a possible FINRA enforcement action against not only the transitioning advisor but their employer firm, as well.

Furthermore, transitioning advisors should also be mindful of the Broker Protocol, which addresses what type of client information an advisor may bring with him-or-herself to a new employer. Originally agreed to in 2004 by Merrill Lynch, UBS, and Smith Barney, the Broker Protocol represented a form of ceasefire amongst brokerage firms who historically aggressively litigated financial advisor transitions. Having expanded significantly since 2004, with more than 1,900 signatories to date, the Broker Protocol allows a transitioning advisor to take the following client information, and nothing else: client names, addresses, telephone numbers, email addresses, and account titles. In addition, both firms—the firm the advisor is leaving and the firm to which the advisor is going—must be signatories to the Protocol. Other requirements apply, and based on any specific set of facts and circumstances, a transitioning advisor may easily risk running afoul of the Broker Protocol.

The attorneys at Giarrusso Law Group LLC have considerable experience with issues unique to the financial services industry, including financial advisor transitions. We can help provide you with guidance toward ensuring a seamless transition between firms. Should you have any questions, please contact us at (201) 771-1115 or info@gialawgroup.com for a no-cost, no-obligation, confidential consultation.