New York Securities Lawyer Blog
According to a Complaint filed by Janney Montgomery Scott (“Janney”) in the Eastern District of Pennsylvania, financial advisor Jordan Braunstein (“Braunstein”) left with firm client data and violated the restrictive covenants in his contracts. The Complaint recited that when Braunstein departed Janney for Paradigm Wealth Management, he took not only his own client list, but also a list of all the clients serviced by the Lexington Avenue Wealth management team that he led, including many who were introduced and serviced by other advisors on the team.
Janney took the position that Braunstein violated both the Protocol for Broker Recruiting (“the Protocol”) and the Lexington Avenue Team Agreement, arguing that Braunstein was allowed to take only a limited list of legacy clients he brought over from Morgan Stanley and clients he introduced to the Lexington Avenue Team while at Janney. But, Janney reasoned, he could not take clients that other members of the team had originated. Pending a hearing on the matter, the Judge issued a temporary restraining order (“TRO”) barring Braunstein from soliciting any of Janney’s clients. Firms can obtain TROs through any court of competent jurisdiction, pursuant to FINRA Rule 13804 upon a showing of three elements: (1) a likelihood of ultimate success on the merits; (2) the prospect of irreparable injury if the provisional relief is withheld; and (3) a balance of equities tipping in the moving party’s favor. A party seeking a TRO from court is also required to submit to arbitration and at the same time file with the Director a statement of claim requesting permanent injunctive and all other relief relating to the same dispute. A party will then need to prevail at an arbitration hearing in order to convert the TRO into a permanent injunction.
Whenever a financial professional exits a team, important legal questions arise surrounding the sourcing of client relationships, the servicing of clients, the existence of joint rep codes or client revenue sharing agreements, and ultimately the ownership of client relationships. While brokerage firms have the incentive to restrict departing brokers’ client contact to prevent customers and assets from leaving the firm, brokers clearly have the incentive to retain their books of business upon switching firms to the extent same does not violate any restrictive covenants in their employment agreements. Firms are required by FINRA Regulatory Notice 19-10 to provide customers with a departing broker’s new contact information if the firms have it, but only if the customers ask. Successfully navigating FINRA Rules, federal privacy laws and employment agreements can mean the difference between a smooth transition and receiving a TRO preventing the solicitation or servicing of clients at a new firm.
The attorneys at Lax & Neville regularly assist financial advisors in transitioning between wirehouses, broker-dealers and independent firms, in addition to helping brokers construct Registered Investment Advisory setups. The attorneys are highly experienced in helping brokers navigate the restrictive covenants contained within their departing firm employment agreements, negotiating favorable terms in incoming firm employment agreements, and ensuring that litigation risk is minimized during the fraught period of transitioning client accounts to a new firm. Lax & Neville carefully drafts strategic resignation letters for departing brokers, acknowledging whether the move is protocol or non-protocol, referencing how the broker intends to comply with applicable restrictions, and documenting which information if any brokers have the right to take. FINRA Rule 19-10 is an additional tool for the attorneys here to use to help brokers in ensuring clients at their departing firm are provided the ability to contact them.
The attorneys at Lax & Neville LLP have extensive experience in successfully transitioning brokers between firms, while being mindful of restrictive covenants and other legal obligations to the departing firm. If you are considering a transition, please contact Lax & Neville LLP today at (212) 696-1999 to schedule a consultation.