When an investment advisor or broker decides to break away from their current firm and go independent, there are several legal considerations to keep in mind. The first is to contact expert legal counsel (of course). It's the cheapest business insurance you can find... expert legal counsel will help you focus on maximizing the value of your book and put your mind at ease. You need to do it the right way. How can you prepare in advance of contacting Abell Law for help? Here are some suggestions:
1. Employment agreements and contractual obligations: Review your employment contract and any restrictive covenants, such as non-compete, non-solicitation, or confidentiality clauses. These provisions may impact your ability to start your own practice, solicit clients, or use proprietary information from your previous firm. You should have an experienced financial services attorney review these contracts with you - explaining how the terms are interpreted by attorneys and firms in the industry.
2. Non-Competes and Non-Solicitation: Non-solicitation provisions prevent advisors or brokers from soliciting former clients, employees, or business partners for a specified period after leaving the firm. Non-compete provisions restrict advisors or brokers from engaging in business activities that compete with their former firm within a specific geographic area and for a certain period.
Are you permitted to compete against your old firm?
What does your state law consider to be enforceable or unenforceable?
Has your firm gone too far in the agreement?
Can you solicit? If not, what does it mean to solicit?
Can you initiate contact your clients?
These questions are often answered in the contract or by application of governing law. Often these laws vary considerably between states. Some states, like California, may not enforce the non-compete agreement except in limited circumstances. Other states may enforce non-competes if they are deemed reasonable in scope, duration, and geographic area. What is "reasonable" is often uncertain and based on caselaw in that state. Consult with legal counsel to determine the enforceability of the non-compete provision and the scope of the non-solicit provision and develop a plan to comply with or challenge the restrictions. legal counsel can often work with your old firm to resolve issues without going to litigation.
3. The Broker Protocol: Does it apply or not? If both your current firm and the new independent firm you're joining are members of the Broker Protocol, you should follow the guidelines outlined in the Protocol to ensure a smooth transition and minimize potential legal disputes. The Protocol sets forth the five types of client information that can be taken when transitioning between firms and the procedures to follow. Be careful, as simple and straightforward as the Protocol may seem many advisors and brokers find a way to violate it and lose the benefits. It is worth a few dollars to have an experienced attorney help walk you through the process so you don't blow your Protocol cover.
4. Confidentiality Provisions: Confidentiality provisions in an employment agreement are designed to protect the firm's proprietary information and client Non-Public Personal Information (NPI). When breaking away, advisors or brokers must determine what customer and firm information can be taken. As a general rule, advisors or brokers should not take any proprietary or confidential information from their former firm without permission. Some examples include client lists, internal reports, and firm strategies. You must also identify what information must be returned or destroyed. You are typically required to return all proprietary and confidential information to your former firm upon resignation/termination. Review your employment agreement for the specific requirements on how and when to return or destroy this information. Confidentiality is often the basis for disputes and often leads to litigation.
5. Client privacy and data security: Be aware of privacy regulations such as Regulation S-P and other privacy laws that protect client NPI. When transitioning clients, ensure that you have proper consent and follow all relevant regulations and industry best practices regarding data security and handling of client information. The SEC has been focused on provacy compliance... a violation of Regulation S-P can lead to massive fines and suspension... don't make assumptions. Again, an experienced attorney can make sure that you are compliant.
6. Compliance with regulatory requirements: As an independent investment advisor or broker, you will be responsible for ensuring compliance with all applicable federal and state securities regulations. This may include registering with the SEC or state regulators, creating and maintaining a compliance program, and adhering to the Investment Advisers Act of 1940 or the Securities Exchange Act of 1934, as applicable. If you have any disclosures on your CRD or your Form U-5 contains (or is likely to contain) any disclosures you will receive inquiries from FINRA, the SEC and/or state regulators. This NOT the time to wing it... your licensure is in the balance. Hire experienced counsel to assist you in preparing your response to the regulators. Preparing a complete, fully vetted and appropriate response to regulators can significantly improve your chances of licensure and avoiding long delays (60-90 days). We have found that regulators greatly appreciate the fact that you have retained counsel, spent time preparing a professional response and treated the process with respect.
7. Transition Plan and Communication with Clients: You should develop a comprehensive plan for your move and the transitioning of client accounts to your new firm. Plan and practice your communication with clients. Understand when and how you may communicate with clients. Can you initiate or must they initiate contact? Prepare scripts for your announcement. Consider how you'll answer questions from clients. Develop a communication plan for clients describing the transfer process. Be transparent and ensure that you follow all applicable regulations and best practices when discussing the transition with clients.
8, Planning Stages - What can you do: Develop a complete understanding of what you can do prior to your resignation - the planning stages. Can you pre-announce to colleagues or customers? ...is it permitted under your agreement? Can you execute agreements with a new firm or form a new entity with your state corporations commission before you resign? These are questions best discussed with experienced legal counsel who will help you navigate within the scope of the applicable laws and regulations.
Before making any decisions or taking action, it is essential to consult with legal counsel and other professionals familiar with your specific situation and the securities industry to ensure a successful transition to independence. Abell Law is an expert in this field and can help maximize the value of your transition - making it as smooth and uneventful as possible.
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