For financial professionals who are transitioning employment in their industry, it is important to consider the legal implications and potential risks involved in making the move. Understanding these issues ahead of time can make the entire process smoother and help avoid any contentious litigation, experts including Douglas Hyman of Lewitas Hyman recently told Financial Planning.
Those considering leaving their firms to become independent registered investment advisors need to be aware of their remaining responsibilities to their employer before they depart, Hyman explained.
“In terms of avoiding litigation, your former employer is who you should be most concerned about. In that respect, it’s very important to have a complete understanding of your obligations to your former employer,” he told the magazine. “In this regard, you should retain experienced legal counsel who can help you understand and comply with those obligations as it relates to the planning stages of the transition, the actual transition and how you conduct yourself with respect to clients that you seek to move to your new firm.”
Advisors starting RIAs also must consider regulatory restrictions imposed on representatives conducting independent business activities. Hyman said advisors must take the necessary steps to make sure they are in full compliance with requirements imposed by regulators. He also emphasized the importance of having expert legal advice to assist with all aspects of the transition.
“Setting up a good compliance program that anticipates expected growth when you start the RIA is an important piece of minimizing overall litigation risk in your practice,” Hyman said. “In this regard, hiring experienced legal counsel, compliance professionals and/or consultants are important components of risk management.”
Another factor to consider is that registered representatives who move from one participating broker-dealer or RIA to another are protected by the Broker Protocol agreement. It frees representatives from restrictive covenants involving solicitation of clients, said Hyman. “It will allow them to take some very basic information about their clients, such as their names, addresses, telephone numbers and email addresses,” he said. “However, the firm may qualify their participation in the Broker Protocol, and registered representatives lose the protections of the Broker Protocol if they do not follow its requirements. It is thus very important to consult with experienced legal counsel prior to relying on the Broker Protocol.” He added that for firms not covered by the Broker Protocol, representatives would have to comply with provisions set out in their employment agreements.
Advisors making a transition must also be aware of restrictive covenants that may be contained in their employment agreements or other documents they have signed.
“Broadly speaking, restrictive covenants and the misuse of confidential information are at the root of most litigation arising out of transitions,” Hyman said. “These are risk points. Most of them are going to be set forth in your employment agreement. However, in the case of misusing confidential information, there may also be statutes that could give rise to a lawsuit.”
If you are looking to move from one firm to another, planning to go open up or join an RIA, looking to sell your firm or grow through acquisition or bringing on new advisors, contact the attorneys at Lewitas Hyman who can properly advise you in this area. We bring decades of industry experience, having worked for large financial institutions and the SEC.
For over 25 years Doug Hyman has been representing investors, brokerage firms, registered representatives, investment advisor representatives and RIAs in various types of matters relevant to the financial services industry, both in the context of general counseling and in connection with representing clients nationwide in arbitrations and in state/federal courts. For more information, contact Lewitas Hyman at (312) 291-4600 or through our online contact form for a free consultation.