Thursday, January 21, 2021

Gary Gensler Nominated to be the New SEC Chairman

On January 18th, a few days before Biden was sworn in as President, he announced his nomination for the new Securities and Exchange Commission (“SEC”) chairman.  President Joseph Biden named Gary Gensler as his pick for SEC chairman[1].  While Gensler still needs to be confirmed by the senate[2], it is expected that he will be approved. Gensler’s confirmation will create a 3-2 democratic majority in the SEC commission.

Gary Gensler has an extensive resume within the financial industry.  He is a former Commodity Futures Trading Commission (“CFTC”) chairman, and is known for supporting intensive regulation. During his tenure at the CFTC, he introduced new rules concerning derivative markets, and implemented the Dodd-Frank Act of 2010.  Gensler has also worked inside the industry he regulated, as an executive at Goldman Sachs from 1979 to the late 1990s[3]. Gensler has served as Secretary of the Treasury for Domestic Finance and Assistant Secretary of the Treasury for Financial Markets[4]. Currently, he is a professor of Global Economics and Management at MIT Sloan School of Management[5].

Gary Gensler is recognized as an aggressive regulator. He is known to be direct about his policy decisions and not straying away from controversy[6]. Gensler’s transparent conduct can be beneficial for the SEC, and also beneficial to those who fall under SEC regulation. Transparency in decision making can make it easier to predict what new polices could be passed, but more importantly, how those polices will affect the securities industry. This is primarily because Gensler is unambiguous about what he wants to accomplish. Gensler is consistent. While Gensler is transparent about his policy decisions, he advocates for that same transparency within securities markets. Possible changes include an increase in ESG disclosures[7], possible new rules to “swaps” (similar to his actions as CFTC Chairman), and increased whistleblower protections[8].

Gensler may impact the cryptocurrency industry. Gensler is a supporter of Bitcoin and other cryptocurrencies, however, he has also indicated the possibility of some cryptocurrencies falling under the scope of securities definitions (such as XRP)[9]. Overall, we can expect Gensler and the SEC to become more hands-on when it comes to regulation. 

At Cosgrove Law Group, we will be keeping a close eye on potential new regulation by the SEC. If you have any questions regarding securities regulations and rules, please feel free to give us a call at 314-563-2490.

Please follow us on Twitter @CosLawGroup, on LinkedIn at Cosgrove Law Group, LLC, and on Facebook at Cosgrove Law Group, LLC

 

[1] Politi, J. (2021, January 18). Biden names Gensler as SEC head in push towards more scrutiny. Retrieved January 21, 2021, from https://www.ft.com/content/a1ddd082-a253-4148-975a-1ec85b5e94d0

[2] Dizikes, P. (2021, January 19). MIT Sloan's Gary Gensler to be nominated for chair of Securities and Exchange Commission. Retrieved January 21, 2021, from https://news.mit.edu/2021/gary-gensler-nominated-chair-sec-0119

[3] Gary Gensler. (n.d.). Retrieved January 21, 2021, from https://ballotpedia.org/Gary_Gensler

[4] Sprunt, B. (2021, January 18). Biden Taps Veteran Financial Regulators To Lead SEC, CFPB. Retrieved January 21, 2021, from https://www.npr.org/sections/biden-transition-updates/2021/01/18/958023670/biden-taps-veteran-financial-regulators-to-lead-sec-cfpb

[5] Lundy, J. G., MacPhail, M. R., & Porteous, D. W. (2021, January 19). President Biden Announces Gary Gensler as SEC Chair Nominee. Retrieved January 21, 2021, from https://www.natlawreview.com/article/president-biden-announces-gary-gensler-sec-chair-nominee

[6] Nicodemus, A. (2021, January 19). 'A very strong and vocal regulator': Biden taps Gary Gensler to lead SEC. Retrieved January 21, 2021, from https://www.complianceweek.com/regulatory-policy/a-very-strong-and-vocal-regulator-biden-taps-gary-gensler-to-lead-sec/29931.article

[7] Glazer, E. (2021, January 18). Companies Brace Themselves for New ESG Regulations Under Biden. Retrieved January 21, 2021, from https://www.wsj.com/articles/companies-brace-themselves-for-new-esg-regulations-under-biden-11610719200

[8] Schweller, G. (2021, January 18). Biden Picks Gary Gensler to Chair SEC. Retrieved January 21, 2021, from https://whistleblowersblog.org/2021/01/articles/whistleblower-news/biden-picks-gary-gensler-to-chair-sec/

[9] Basar, S. (2021, January 21). Crypto Industry Eyes Gary Gensler at SEC. Retrieved January 21, 2021, from https://www.tradersmagazine.com/am/crypto-industry-eyes-gary-gensler-at-sec/

 

Wednesday, January 6, 2021

FINRA Orders Worden to Pay $1.2 Million in Restitution to Customers Whose Accounts Were Excessively Traded

FINRA announced last week that it sanctioned Worden Capital Management LLC (WCM) more than $1.5 million, including approximately $1.2 million in restitution to customers whose accounts were excessively traded by the firm’s representatives, and a $350,000 fine for supervisory and other violations. WCM must also retain an independent consultant to conduct a comprehensive review of the relevant portions of the firm’s supervisory systems and procedures.

FINRA found that from January 2015 to October 2019, WCM and the firm’s owner and CEO, Jamie Worden, failed to establish and enforce a supervisory system reasonably designed to achieve compliance with FINRA’s rules relating to excessive trading. As a result, WCM’s registered representatives made unsuitable recommendations and excessively traded customers’ accounts, causing customers to incur more than $1.2 million in commissions..

Jessica Hopper, Head of FINRA’s Department of Enforcement, said, “FINRA has an unwavering commitment to protect investors from excessive and unsuitable trading. Firms must ensure they establish systems and procedures reasonably designed to supervise representatives’ recommendations to their customers, and firms’ supervisory personnel must have in place the necessary tools and training to address red flags.”

FINRA also found that WCM and Worden interfered with customers’ requests to transfer their accounts to another member firm. Finally, as a result of supervisory failures, WCM failed to timely file amendments to registered representatives’ Form U4s and Form U5s to disclose the filing or resolution of customer arbitrations[1]



[1] Michelle, Ong. (2020, December 31). FINRA Orders Worden Capital Management LLC to Pay More than $1.2 Million in Restitution to Customers Whose Accounts Were Excessively Traded. Retrieved January 05, 2021, from https://www.finra.org/media-center/newsreleases/2020/finra-orders-worden-capital-management-llc-pay-more-12-million

 

Monday, December 14, 2020

What Chairman Jay Clayton’s Resignation Could Mean for Future of Financial Regulation

On November 16th, 2020 Securities and Exchange Commission (“SEC”) Chairman, Jay Clayton announced he will be stepping down from his position at the end of 2020[1]. The Chairman’s announcement comes as no surprise, mainly due to Joe Biden’s presidential victory. SEC chairs typically step down when there is a new president elect[2]. (Former Chair Mary Jo White stepped down in 2016 after current President Donald Trump’s election[3] and former Chair Mary Schapiro resigned in 2012 after former President Barack Obama’s election.[4]) President-Elect Joe Biden is likely to nominate a new chairman before his inauguration on January 20th, 2021.

SEC Commissioner, Allison Lee is positioned to become the acting Chair until President Biden appoints a replacement for Jay Clayton[5]. Possible appointments include former SEC commissioner Kara Stein, Former commissioner Rob Jackson, Preet Bharara, a former United States attorney for the Sothern District of New York, Maxine Waters head of the House Financial Services Committee and, Gary Gensler who is currently leading the financial policy transition team for the future Biden administration[6].  

An appointment of a democratic chair will create a democratic majority within the commission. Historically, democratic members of the SEC rely heavier on enforcement than their republican counterparts. Gary Gensler, for example, aggressively implemented regulations such as the Dodd-Frank Act during his tenure as chairman of the Commodities Futures Trading Commission (“CFTC”)[7]. The appointment of a democratic chair within the SEC will result in increased enforcement and investigations.

The main question lies in where the priorities of enforcement will be.  Over the previous 3-years, the SEC commission focused more on deregulation and lowering business costs[8].  A democratic commission will possibly shift focus onto increased regulation, specifically on private markets. Additionally, environmental, social, and corporate governance (“ESG”) disclosures are likely to become a larger part of SEC enforcement in a democratic commission, particularly regarding environmental disclosures. Democratic Commissioner Allison Herren-Lee has advocated for standardized reporting for public companies regarding their climate risk[9] efforts which could lead to another amendment to Regulation S-K. Regulation Best Interest and Shareholder Proxy Voting are both expected to come under review with a democratic commission[10]. While these are just theories about what could potentially happen, it is still not for certain. When a new chair is nominated and confirmed, we will have a better idea of what to expect from the SEC. Here at Cosgrove Law Group, LLC we will keep an eye on future changes within the SEC and CFTC.



[1] Sorkin, A., Karaian, J., Merced, M., Hirsch, L., & Livni, E. (2020, November 16). Trump's S.E.C. Chairman Is Stepping Down. Retrieved November 30, 2020, from https://www.nytimes.com/2020/11/16/business/dealbook/clayton-sec-stepping-down.html 

[2] Cox, J. (2020, November 16). Jay Clayton says he will step down early as head of the SEC at the end of 2020. Retrieved November 30, 2020, from https://www.cnbc.com/2020/11/16/jay-clayton-says-he-will-step-down-early-as-head-of-the-sec-at-the-end-of-2020.html 

[3] Merle, R. (2019, March 28). SEC chair to step down, clearing path for Trump to eliminate tough Wall Street regulations. Retrieved November 30, 2020, from https://www.washingtonpost.com/news/business/wp/2016/11/14/sec-chair-to-step-down-clearing-path-for-trump-to-eliminate-tough-wall-street-regulations/ 

[4] Press Release. (2012, November 26). Retrieved November 30, 2020, from https://www.sec.gov/news/press-release/2012-2012-240htm 

5 Schroeder, P., Price, M., & Johnson, K. (2020, November 27). Factbox: The top contenders to run Biden's financial agencies. Retrieved November 30, 2020, from https://www.reuters.com/article/us-usa-biden-wallstreet-regulators-factb/factbox-the-top-contenders-to-run-bidens-financial-agencies-idUSKBN28716L 

[6] Schroeder, P., Price, M., & Johnson, K. (2020, November 27). Factbox: The top contenders to run Biden's financial agencies. Retrieved November 30, 2020, from https://www.reuters.com/article/us-usa-biden-wallstreet-regulators-factb/factbox-the-top-contenders-to-run-bidens-financial-agencies-idUSKBN28716L

 [7] Miedema, D. (2014, January 03). Swaps regulator Gensler: Banker turned Wall Street scourge. Retrieved December 01, 2020, from https://www.reuters.com/article/us-financial-regulation-gensler/swaps-regulator-gensler-banker-turned-wall-street-scourge-idUSBREA020OC20140103 

[8] Zanki, T. (2020, October 20). 4 Ways A Biden Election Could Swing SEC Priorities. Retrieved December 01, 2020, from https://www.law360.com/articles/1319347 

[9] Pisani, B. (2020, November 12). What a Democrat-controlled SEC might look like and what it would mean for markets. Retrieved December 01, 2020, from https://www.cnbc.com/2020/11/11/what-a-democrat-controlled-sec-might-look-like-and-what-it-would-mean-for-markets.html 

[10] Rasmussen, P., & Tehrani, P. (2020, November 7). ANALYSIS: Four Spots Biden Is Likely to Reverse SEC Deregulation. Retrieved December 01, 2020, from https://news.bloomberglaw.com/bloomberg-law-analysis/analysis-four-spots-biden-is-likely-to-reverse-sec-deregulation

 AUTHOR: Julianna M. Ness

Please follow us on Twitter @CosLawGroup, on LinkedIn at Cosgrove Law Group, LLC, and on Facebook at Cosgrove Law Group, LLC

Thursday, December 10, 2020

Missouri Securities Division Brings Action for Unregistered Investment Advice

Missouri’s Commissioner of Securities recently issued an Order to Cease and Desist against a California resident that was allegedly collecting fees to provide advice regarding stock selections. According to the order, Yifel Lu (“Lu”), “…for compensation, provided unregistered investment advice to individuals throughout the United States. Lu touted personal success in the United States stock market in an internet chat room. When asked for Lu’s advice, Lu instructed individuals to contact him on a separate phone/computer application. Once alternative contact was established, Lu proceeded to require clients to pay a fee of at least $300 for his advice. When the fee was agreed upon, Lu instructed clients to deposit funds electrically into a PayPal account.”  

Moreover, a Missouri Resident initially met Lu in a public chatroom on Moonbbs “where Lu, using the username “kyoraiden123,” touted his personal success in the United States stock market and advertised stock-selection advice. Lu promised multiple stock tips with the potential for high profit.”

The Enforcement Section is seeking disgorgement of the $300 fees and over $75,00 in civil penalties. Food for thought.

Monday, October 12, 2020

Robinhood Brokerage app under SEC and FINRA investigations

 Author: Juliana M. Ness, Cosgrove Law Group, LLC

In early September of this year, Robinhood (a brokerage app) became the subject of investigations by both the U.S. Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (FINRA)[1]. Both regulators cite two central concerns regarding Robinhood. The first relates to Robinhood’s practice of selling client orders to high-speed trading firms such as Citadel Securities and Two Sigma Securities[2]. The second relates to trading outages that occurred on Robinhood’s platform in March of 2020, the longest of which lasted 17 hours[3].  

The SEC and FINRA investigations regarding Robinhood’s practice of selling client orders to third parties mainly focuses on disclosures. Robinhood did not have public disclosures regarding its third-party relations until 2018. This practice is one of Robinhood’s primary sources of income[4]. (Nearly 70% of Robinhood’s income comes from high-speed trading.) The SEC investigation aims to determine whether the lack of disclosure by Robinhood could be considered Civil Fraud[5]. If determined that Robinhood’s actions were Civil Fraud, Robinhood may face an SEC fine upwards to 10 Million Dollars. 

The SEC and FINRA are also reviewing trading outages within Robinhood’s platform. Robinhood’s defense to the investigation regarding the March outages includes the discussion of extreme volume increases. Robinhood claims that in March, high market volatility and a record number of new accounts generated stress on the brokerage application’s infrastructure[6]. The unusually high demand for trading in March short-circuited Robinhood’s platform, causing the outage. More than 400 complaints against Robinhood were filed in this year’s first quarter, possibly sparking SEC and FINRA interest. Yet the trading outages have not been resolved. A similar event occurred in late August after stock splits from Apple and Tesla generated an increased demand for trading. This resulted in service outages not only at Robinhood but other brokerages such as Vanguard, Charles Schwab, TD Ameritrade, and Merrill Lynch[7]. In June, Robinhood reported an astonishing 4.32 million new accounts. The app continues to gain users, which puts it in a position for review by regulatory agencies.

The investigations into the outages also sparks an important question--Is technological failure result responsibility of brokerages when the failure resulted in possible investor losses? This question becomes more complex regarding technical issues that relate to an increase in user demand generating outages. Brokerages may not be able to reasonably foresee these issues. Robinhood is also a new company, established in 2013, and follows a business model different from most large brokerages. Since Robinhood’s platform does not use financial advisors, how much responsibility does the brokerage have when it comes to the service it provides to the client? More investment applications similar to Robinhood are popping up, and regulators are working on ways to better regulate this new trend.

 

 



[1] Brasseur, K. (2020, September 01). Robinhood adds two CCOs amid reported SEC probe. Retrieved October 07, 2020, from https://www.complianceweek.com/grapevine/robinhood-adds-two-ccos-amid-reported-sec-probe/29391.article

[2] Smith, K. (2020, September 03). Robinhood Facing Multiple SEC Investigations Into Its Business Practices. Retrieved October 07, 2020, from https://www.forbes.com/sites/advisor/2020/09/03/robinhood-investigation-sec-finra/

[3]Robinson, M., Alexander, S., & Massa, A. (2020, September 03). Robinhood Probed by SEC Over Payments From High-Speed Traders. Retrieved October 07, 2020, from https://www.bloomberg.com/news/articles/2020-09-03/robinhood-probed-by-sec-over-payments-from-high-speed-traders

[4] Gunderia, E. (2020, September 03). Robinhood Under SEC Investigation. Retrieved October 07, 2020, from https://www.thestreet.com/streetlightning/stock-picks/secinvestigaton-robinhood-paymentforoderflow

[5] Gaus, A. (2020, September 02). Robinhood Faces SEC Fraud Investigation: Report. Retrieved October 07, 2020, from https://www.thestreet.com/investing/robinhood-faces-sec-fraud-investigation-report

[6] Tabacco, C. (2020, September 03). Robinhood Faces Investigations from SEC and FINRA - Tech. Retrieved October 07, 2020, from https://lawstreetmedia.com/tech/robinhood-faces-investigations-from-sec-and-finra/

[7] Ongweso, E., Jr. (2020, August 31). Tesla and Apple Stock Split, Investors Crash Robinhood, Nothing Makes Sense. Retrieved October 07, 2020, from https://www.vice.com/en/article/3azeeb/tesla-and-apple-stock-split-investors-crash-robinhood-nothing-makes-sense

Monday, September 28, 2020

SEC Amends Whistleblower Award Rules

AuthorJuliana M. Ness, Cosgrove Law Group, LLC

On Wednesday, September 23, 2020, the Securities and Exchange Commission (the “SEC”) amended rules within their Whistleblower program. Their primary motivations behind these new amendments are to increase efficiency, transparency, and provide greater clarity within their decade-old program [1]. Since the inception of the program, The SEC has awarded nearly $523 million to whistleblowers. These new changes directly affect award amounts, establishing new criteria for whistleblower payouts, along with definitions to clarify the program’s award process.

The passed amendments assert the SEC’s authority in determining award amounts for whistleblowers[2].  An action defined within the Dodd-Frank Wall Street Reform and Consumer Protection Act (The Dodd-Frank Act) specifies that the SEC should determine an award amount that lies within 10-30 percent of monetary sanctions collected[3]. Since the development of the whistleblower program, the SEC has used this rule. A proposed amendment in July of 2018 would have codified the SEC’s role in determining award amounts (including downward adjustments1) within the Whistleblower program itself2. The SEC scrapped that proposal, claiming that the stipulation is not necessary to add. Similarly, another proposal enumerated in June of 20183 advocated for caps on awards. The SEC also rejected this proposal due to controversy over the idea of award caps. Critics of the proposal argued that caps would disincentivize individuals from blowing the whistle on critical violations. 

One of the amendments passed adds a presumption that whistleblowers who qualify for awards below $5 Million will receive the maximum statutory award amount. (30% of Monterey sanctions)2 This amendment to rule 21F-6(b) aims at creating more of an incentive for whistleblowers that would otherwise receive a lower award amount. Other awards over $5 million will remain under the determination of the SEC’s award criteria within Rule 21F-6. The enumerated criteria include both positives and negatives that affect award amounts. Examples of these criteria include but are not limited to the significance of the tip, the extent of assistance, delay in reporting, and integrity with compliance systems.  

The SEC also voted to clarify definitions of key terms within the rules. Rule 21F-2 modifications were aimed at establishing a uniform definition of “Whistleblower” in response to a 2018 Supreme Court decision.1,[4]These changes impact retaliation policies. Likewise, the SEC narrowed the scope of “related actions” concerning whistleblower awards1. The changes within rule 21F-3 state that any whistleblowers that pass on original information to another enforcement agency may also receive a reward for the SEC if that information led to the recovery of over 1 million in monetary sanctions3. The agencies included are the Attorney General of the United States, an appropriate regulatory authority, a self-regulatory organization, or a state attorney general in a criminal case3. This rule does not apply in cases where a sperate whistleblower award from another enforcement agency is more appropriate.  In short, the definition specifies that a whistleblower cannot obtain two separate awards for the same information and reports. 

The amendments take effect 30 days after publication in the Federal Register.




[1] Securities and Exchange Commission. (2020, September 23). Press Release. Retrieved September 25, 2020, from https://www.sec.gov/news/press-release/2020-219

[2] Barbarino, A. (2020, September 23). SEC Rule Asserts Authority To Adjust Whistleblower Awards. Retrieved September 25, 2020, from https://www.law360.com/assetmanagement/articles/1312156/sec-rule-asserts-authority-to-adjust-whistleblower-awards

[3] Zuckerman, J., Stock, M., & Krems, K. (2020, September 24). SEC Adopts Amendments to Whistleblower Rules that Will Strengthen Some Aspects of the Program But Also Reduce Large Awards and Limit Protection Against Retaliation. Retrieved September 25, 2020, from https://www.natlawreview.com/article/sec-adopts-amendments-to-whistleblower-rules-will-strengthen-some-aspects-program

[4] Wilson, S., & Achilles, J. (2018, March 3). Four key takeaways from the Supreme Court's decision in Digital Realty Trust, Inc. v. Somers, 138 U.S. 767  (2018): Perspectives: Reed Smith LLP. Retrieved September 25, 2020, from https://www.reedsmith.com/en/perspectives/2018/03/four-takeaways-from-supreme-court-in-digital-realty-trust-inc-v-somers

 

Thursday, September 17, 2020

The Financial Advisor Succession Agreement

 “The Financial Advisor Succession Agreement: Can the Receiving Financial Advisor Contact Clients Associated with the Financial Advisor Succession Agreement upon Departure from the Firm?” 

Author: Brian St. James

What happens when a financial advisor enters into a Financial Advisor Succession Agreement and subsequently chooses to depart the firm? Is she or he able to contact those succession account clients after she or he lands at the new firm? As with most questions of this nature, the answer is “it depends.” 

A Financial Advisor Succession Agreement (the “Agreement”) is generally by and among the retiring financial advisor (the "Retiring FA"), the receiving financial advisor (the "Receiving FA") and the firm (the “Firm”), and is entered into pursuant to the terms of a Financial Advisor Succession Program.  The purposes are generally to  provide for trailing commissions to be paid the Retiring FA (the "Post-Retirement Payments") following the retirement date, and to ensure clients serviced by Retiring FA (the "Financial Advisor Succession Accounts") enjoy uninterrupted service throughout the defined post-retirement period as set forth in the Agreement (the “Post-Retirement Period"). Also, Receiving FA services the Financial Advisor Succession Accounts as a participant under the Agreement, and generally if Receiving FA departs the Firm for any reason during the Post-Retirement Period, then generally the Firm will re-assign the Financial Advisor Succession Accounts for servicing to another receiving FA so Post-Retirement Payments can continue until the end of the Post-Retirement Period. 

The Agreement may or may not contain a non-solicitation provision that prevents the solicitation of clients associated with the Financial Advisor Succession Accounts by the Receiving FA for a period of time after departure from the Firm. An industry-standard non-solicitation clause generally provides in some form or fashion for the following essential terms:

 “If Receiving FA's employment with the Firm terminates for any reason prior to the end of the Post-Retirement Period, she or he will not, for a period of one (1) year following such transition, directly or indirectly, on his or her behalf or on behalf of any other person,  solicit any clients associated with the Financial Advisor Succession Accounts for the purposes of providing financial services identical to or reasonably substitutable for the Firm’s financial services.  Solicitation shall include, but not limited to, contact or communication by mail, phone, email, or by any other means, either directly or indirectly, with any other person or party, for the purpose of requesting, encouraging, or inviting the transfer of an account from the Firm, the opening of new accounts with any other organization that does business in securities, or discontinuing any relationship with the Firm."  

The Agreement also may or not contain a non-disclosure provision that prevents the use of client information by the Receiving FA to solicit clients after departure from the Firm. An industry-standard non-disclosure provision may generally state as follows: 

Receiving FA shall not remove, use, disclose or transmit any confidential information or documents related to the Financial Advisor Succession Accounts or clients associated with the Financial Advisor Succession Accounts, including, but not limited to the names, addresses, phone numbers, account holdings or financial information related to the  Financial Advisor Succession Accounts."  

Based upon the inter-working of the non-solicitation and non-disclosure provisions, it seems abundantly clear that Receiving FA cannot contact any clients associated with the Financial Advisor Succession Accounts without breaching the Agreement. The analytical framework requires looking in two places to determine whether this is correct or not. 

The first is the Protocol for Broker Recruiting (the "Protocol"). In general, when a registered representative (“RR”) moves from one firm to another and both are signatories to the Protocol, the departing RR may take with him/her the client name, address, phone number, email address and account title of clients that she or he serviced while at the departing firm with him/her (the "Client Information"). RRs who comply with the Protocol are "free to solicit customers that they serviced while at their former firm" after she or he joins their new firms, and with the exceptions of team agreements and raiding cases, neither the departing RR or the firm that she or he joins "would have any monetary or other liability by reason of the RR taking Client Information or the solicitation of clients." 

The Protocol therefore seems rather definitive that Receiving FA can take Client Information with him/her to another signatory to the Protocol, but that is not the case with the Agreement, with respect to which the Protocol clearly states: "[i]f accounts serviced by the departing RR were transferred to the departing RR pursuant to  a retirement program that pays a retiring RR trailing commissions on the accounts in return for certain assistance provided by the retiring RR prior to his or her retirement in transitioning the accounts to the departing RR, the departing RR's ability to take Client Information related to those accounts and the departing RR's right to solicit those accounts shall be governed by the terms of the contract between the retiring RR, the departing RR, and the firm with which both were affiliated.” So, this does not work. 

The second place to look is at the non-solicitation and non-disclosure provisions themselves.  With respect to the non-solicitation provision, it restricts Receiving FA from directly or indirectly soliciting any clients associated with the Financial Advisor Succession Accounts. So, it is necessary to determine what constitutes a "solicitation." Pursuant to the Agreement, "solicitation" is defined to "include, but not limited to, contact or communication by mail, or by any other means, either directly or indirectly, with any other person or party, for the purpose of requesting, encouraging, or inviting the transfer of an account from the Firm, the opening of new accounts with any other organization that does business in securities, or discontinuing any relationship with the Firm."  Consequently, whether or not Receiving FA solicits any clients associated with the Financial Advisor Succession Accounts clients turns on Receiving FA’s intent when contacting the former clients.  

Under Missouri law, if Receiving FA does not do "anything but inform [his/her] former clients of [his/her] new employment," it is not a solicitation. Edward D. Jones & Co. v. Kerr, 415 F.Supp.3d 861, 874 (S.D. Ind. 2019) (applying Missouri law). (See, also fn. 11 that cites several cases for the proposition that merely contacting former clients to inform them of their departure and provide new contact information was not an indirect solicitation). This finding is consistent with Bittiker v. State Bd. of Registration for Healing Arts, 404 S.W.2d 402, 405 (Mo. App. 1966), a seminal Missouri case on what constitutes “soliciting” that states: soliciting "means to ask for or to request something or some action in language which convinces that the asking or requesting is done in earnest and that the solicitor wants results." A mere announcement would not according to Bittiker.    

The Kerr case was cited in Edward D. Jones & Co., L.P. v. Clyburn, No. 7:20CV00433, 2020 WL 4819547 (W.D. Va. Aug. 19, 2020), another case applying Missouri law and involving an industry-standard non-solicitation provision that states as follows: 

"Your agreement not to solicit means that you will not, during your employment with Edward Jones, and for a period of one year thereafter, initiate any contact or communication of any kind whatsoever for the purpose of inviting, encouraging or requesting any Edward Jones client to transfer from Edward Jones to you or to your new employer, to open a new account with you or to your new employer, to open a new account with you or with your new employer or to otherwise discontinue his/her/its patronage and business relationships with Edward Jones."  

Clyburn distinguished Kerr by finding "the district court specifically emphasized that there was 'no evidence to show that Mr. Kerr did anything but inform his former clients of his new employment.'" (citation omitted). Here "Mr. Clyburn contacted specific clients to schedule appointments, ... asked at least three particular clients to move their accounts to Ameriprise, and ... contacted another client more than once and advised her that he wanted to complete the paperwork necessary for her to switch firms." Consequently, there appears to be good authority under Missouri law that if Receiving FA does not do "anything but inform [his/her] former clients of [his/her] new employment," it is not a solicitation. But this safe harbor may be difficult to navigate given the factual circumstances of each client contact in connection with a departure. 

The second question is how to respect the non-disclosure provision without breaching the Agreement. And "Courts are more likely to find … contact constitutes a solicitation when there is evidence that the defendants - employees improperly used confidential records or trade secrets obtained while at their former employers to issue the announcements." Kerr, 414 F.Supp.3d at 877, fn. 12 (and cases cited therein).  

In Kerr it was specifically found that "Mr. Kerr denies using any of Edward Jones's information when issuing his announcement," and that "the transferee clients, who first learned of Mr. Kerr's transition from his announcement, had pre-existing, personal relationships with Mr. Kerr." So, it appears that one way to respect the non-disclosure provision without breaching the Agreement is for Receiving FA to limit the announcement of his/her transition to former clients who have pre-existing, personal relationships with him/her, such as family members or close friends.  Another way appears to be if Receiving FA is also dual registered as an RIA. If so, then the argument can be made that consistent with Receiving FA’s fiduciary duty of care, she or he has to inform his or her former clients of his or her departure from the Firm.  The argument would be that this fiduciary duty is not satisfied by relying upon the Firm to inform your customers, and that this fiduciary duty supersedes the non-disclosure obligation as it relates to using confidential information as to customer names and addresses to issue the announcements.   

Therefore, there is a lot to unpack regarding “it depends.” So, if you need assistance in this regard, you may wish to consult with experienced securities industry counsel at Cosgrove Law Group.  


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