Financial Advisors “On the Move” – Protocol and Covenants You Should Know

1024_heilman_nyse_bull Whether the move is voluntary or as a result of an unexpected termination, financial advisors moving to new brokerage firms face a legal and business quagmire that may affect their ability to serve new and existing clients: What about the client list and the accounts that were serviced with the former firm? Can the new firm be sued for “raiding?”  Is the former firm going to sue, or seek to restrain the financial advisor (alleging tortious interference with contractual relations, breach of covenants not to compete, misappropriation of trade secrets, breach of a fiduciary duty or duty of loyalty, or other related business torts)?  What about U-5 issues?  Will the financial advisor be precluded from working with the clients and in the industry that he has known for years?  And, is the financial advisor entitled to damages against the former employer for claims based on wrongful discharge, or for unpaid commissions and other compensation? Savvy financial advisors shouldn’t make this move without legal advice concerning their rights and duties under this potentially injurious predicament. Among the key considerations are whether the former and new employer brokerage firms are both signatories to the Protocol for Broker Recruiting, and whether the Protocol applies in the individual situation. Also determinative are the terms of the employment agreement, and whether the restrictive covenants are enforceable under state law.   In Virginia, covenants not to compete that have the effect of restraining trade are disfavored and strictly construed against the employer.   The covenants must be narrowly drawn and the restrictions limited by geographic area, time, and scope.   Virginia courts have found the following covenants to be invalid:

  • Those seeking to prohibit the employee from competing with any branch of the former employer’s operations, when the employee had no connection to some of those branches
  • Those seeking to prevent the employee from engaging “directly or indirectly” with business in any area in which the employee had previously worked for two years from the date of termination
  •  Those seeking to prohibit the former employee from working, directly or indirectly, and within a 50 mile radius of any of the employer’s offices, in any capacity, with a competing company for one year after the former employee’s departure from the employer
  • Those seeking to prevent the former employee from engaging, directly or indirectly, with businesses similar to the employer within 100 miles of the employer’s office
  •  Those seeking to prohibit the former employee from contracting with any of the employer’s clients
  • Those seeking to prevent the former employee from working, directly or indirectly, for any company that might solicit business from the employer’s customers for one year after the former employee’s termination

Just because an employment contract has a restrictive covenant does not mean that it is enforceable.  Don’t take the former employer’s (or its lawyer’s) word for it.  Ask an independent lawyer to review the contract, and the move just might be a little smoother.

Securities /Brokerage Firm Litigation News

Our Securities/Brokerage Firm litigation team, led by Mark Krudys, achieved several recent victories on behalf of our clients in front of the Financial Industry Regulation Authority (FINRA) Panel.  In March 2013, our securities team obtained a $300,000 award from FINRA on behalf of a former executive of Anderson & Strudwick, a former Richmond brokerage firm, against five guarantors of a loan that our client made to A&S.  When A&S defaulted on the loan, the five guarantors, former executives at A&S, refused to honor their guaranties.  The FINRA Panel awarded the principal amount of the loan, interest, attorney’s fees, and filing costs.

In June 2013, our team won another FINRA award on behalf of the same former Anderson & Strudwick executive for unpaid employment benefits in the sum of $361,026, plus attorney’s fees and pre- and post-judgement  interest.

In June 2013, our team achieved a signicant ruling from the FINRA Panel against First Command, a Texas-based brokerage firm that markets financial products to the military community.  Our client, a former military officer turned investment advisor, sought to enjoin First Command from enforcing against our client an onerous non-compete clause contained in First Command’s standard employment contract with its investment advisors.  The FINRA Panel ruled that the non-compete clause was unenforceable.  This ruling may have implications for hundreds of First Command investment advisors.