Advisor Alert — Recent FINRA Case Highlights Potential Pitfalls for Transitioning Financial Advisors
On September 9, 2020, a veteran financial advisor with more than three decades of securities industry experience entered into a Letter of Acceptance, Waiver and Consent with FINRA Enforcement. Without admitting or denying FINRA’s findings of fact, the financial advisor—a dually licensed registered representative and investment adviser—consented to a 10-day suspension and $2,500 fine. Specifically, the sanctions imposed by FINRA concerned allegations that the advisor, while in the process of transitioning employment to a major independent broker-dealer, reportedly printed out a list of more than 300 customers which included such confidential information as social security numbers.
This recent FINRA Enforcement matter underscores the need for financial advisors contemplating a transition to properly assess their situation in order to ensure compliance with prevailing regulatory rules. To begin, many financial advisors working at broker-dealers will typically, and understandably, regard the clients they work with as “their clients.” However, from a legal perspective, these clients are, in actuality, clients of the broker-dealer. Accordingly, any financial advisor contemplating a transition to a new employer should first adopt the appropriate mindset, and where appropriate, seek independent and experienced legal counsel to guide and assist with the transition process.
In the early 2000s, the Securities and Exchange Commission adopted Regulation S-P (Privacy of Consumer Financial Information). Regulation S-P imposes substantial obligations on financial services firms, including broker-dealers, to safeguard and protect the privacy of client information. Within the context of a financial advisor transitioning firms, any perceived privacy breach could rise to the level of violating Regulation S-P, and therefore trigger a possible FINRA Enforcement action.
In addition to Regulation S-P, financial advisors must also remain mindful of the Broker Protocol. The Broker Protocol began in 2004, when Merrill Lynch, UBS, and Smith Barney (now Morgan Stanley) entered into an agreement regarding what type of client information registered representatives could take with them when transitioning employment. This agreement came about as a form of ceasefire amongst brokerage firms who would regularly engage in contentious litigation whenever a financial advisor departed one firm for another. From its beginnings in 2004 with three original signatory broker-dealers, the Broker Protocol has significantly expanded, and as of this writing now includes more than 1,900 firms.
Under the Broker Protocol, a financial advisor departing one firm for another is permitted to take the following client information: names, addresses, telephone numbers, email addresses, and account titles. Importantly, in order to take such information, the departing broker must ensure that both the former employer, as well as his or her new firm, are both signatories to the Broker Protocol. A transitioning broker may only take this information under the Broker Protocol, and nothing more. Furthermore, if a broker elects to take such information when departing, then he or she must provide an exact copy of such a list to his or her previous employer.
At first blush, both Regulation S-P and the Broker Protocol may seem relatively straight-forward and simple to navigate. However, as with many rules and regulations surrounding the financial services industry, the devil is in the details. Based on a specific set of facts and circumstances occurring rapidly and in a compressed time frame, the potential is very real for a well-intentioned financial advisor to make a costly misstep.
The attorneys at Giarrusso Law Group LLC have extensive experience with issues unique to the financial services industry, including financial advisor transitions. We can help provide you with guidance to ensure a seamless transition between existing firms, or in the course of establishing your own independent practice. To discuss any potential transitions, please contact us at (201) 771-1115 or by email at info@gialawgroup.com for a no-cost, confidential consultation.