The Financial Industry Regulatory Authority (“FINRA”) fined and suspended Wells Fargo broker Eli Ungar (“Ungar”) for allegedly poaching client data from his former employer the Hong Kong and Shanghai Banking Corporation (“HSBC”). Mr. Ungar has been a registered broker since 2004, and was employed at HSBC from 2008 through 2016. In 2016, after Mr. Ungar’s transition to Wells Fargo, HSBC began a fraud investigation into Mr. Ungar’s activities, alleging that he took HSBC client data, and in doing so violated several investment-related statutes.
Many broker-dealers—including Wells Fargo—are signatories of the Protocol for Broker Recruiting (the “Protocol”), which establishes the type and quantity of client information brokers may transfer from one firm to the next when transitioning. Certain client contact information is allowed to be taken in transitions, however account balances and social security numbers are not, unless two broker-dealers have a specific onboarding relationship with each other that permits the transmission of such data. Regardless, HSBC is not a signatory to the Protocol, making Mr. Ungar’s alleged actions a possible violation of both FINRA rules and contractual obligations to HSBC. Mr. Ungar agreed to a $10,000 fine and 15-day suspension, according to the Settlement FINRA released.
Firms such as HSBC, who are not signatories to the Protocol, often actively try to prevent former employees from leaving with client information. Many brokers sign employment agreements including non-solicitation clauses or other restrictive covenants, thereby complicating their transition to other broker-dealers, especially if their former or future employer is not a member of the Protocol. In these instances, the firms they are leaving may go to court to file injunctions against the former employees, or their new firms, who attempt to utilize these previously acquired client books.
The Protocol was designed to simplify this process and reduce legal risks between brokers. However, its signatories include only a small number of larger banks and broker-dealers, with a majority of broker-dealers choosing to remain non-members. The Protocol allows only the transition of a client name, address, phone number, and email address. Information related to account balances or holdings are disallowed. However, in practice if a broker is managing the clients whose information they are looking to bring with them to a new firm, they may have a rough estimate of client wants and needs based on working knowledge of account balances and risk profiles.
The Protocol also stipulates that, should a client choose to transition with their broker, he/she need only sign an Automated Customer Account Transfer (“ACAT”) document, thereby streamlining the process. Given the bidding war between broker dealers for star brokers and brokers who service ultra-high net worth individuals, the costly and time-consuming legal battles that can ensue during transitions may encourage more firms to sign the Protocol. Brokers should also be aware that the terms of the Protocol also allow for signatories to withdraw at any time, provided they give 10 days’ notice. It is recommended brokers seek legal advice before they begin any transition process, to protect themselves against any possible liability.
Lax & Neville LLP has nationally represented small broker-dealers, financial services professionals and securities industry companies in regulatory matters and securities-related and commercial litigation. Please contact our team of attorneys for a consultation at (212) 696-1999.