Departing brokers and financial advisors transitioning from non-protocol wirehouses to other firms or independence need to fully understand and be prepared to defend against a Temporary Restraining Order (TRO) from their former employer. Non-protocol firms like UBS and Morgan Stanley are eager to initiate legal action as a matter of course, irrespective of the size of the departing advisor’s book of business. In fact, the procedural hurdles associated with presenting and filing a complaint and TRO are relatively low. This article is designed to highlight the pitfalls brokers and advisors should be aware of and avoid when planning their departure. While it may appear that these firms initiate legal action as a matter of course, there are ways to minimize and even avoid costly litigation.

A Procedural Primer

Firms place utmost importance in obtaining a TRO against the departing broker. Aside from being an annoyance and deterrent, this is the firm’s way to “preserve the status quo” by temporarily preventing an outgoing broker from using and disclosing confidential information and soliciting the firm’s customers to the new firm until the matter is heard in FINRA arbitration. More importantly, under FINRA arbitration rules, the granting of a TRO by a court is specifically contemplated and triggers the FINRA requirement that an expedited arbitration be held within fifteen (15) days of the entry of any such injunctive order.¹ Therefore, the risk is not that an action for a TRO will be filed, but that a TRO will be entered by a court. 

Whether a court enters a TRO is fact-specific and depends on the nature of the departing broker’s conduct. In Texas, a party seeking a TRO must demonstrate a likelihood of success on the merits at trial and probable, imminent and irreparable injury absent the TRO.² Overcoming an application for a TRO prevents an expedited arbitration hearing and forces the firm into a much slower arbitration process. Avoiding an application altogether should be the goal of the departing broker. A broker’s conduct in the weeks immediately preceding and after announcing resignation is crucial to overcoming and possibly avoiding a TRO application.

Tips for Avoiding or Beating the TRO

The big wirehouses have highly sophisticated forensic tools capable of recreating a paper trail of an outgoing broker’s misappropriation of confidential information on the way out the door. This includes tracking email usage, browser history, printer/copier activity, logins, remote access, document access, and uploaded information onto cloud and external storage drives. Below is a non-exhaustive list of conduct that can constitute a breach warranting legal action:

• Emailing information belonging to the firm to a personal email account or uploading it to cloud storage or removable storage devices;
• Storing client information on a personal device;
• Using a personal email account to conduct firm business;
• Using a personal cell phone number on your firm email signature line;
• Printing client-related documents prior to resignation that are unaccounted for—i.e., unrelated to a business purpose, unreturned upon termination, unable to be located;
• Destroying physical files and/or clearing out your office space;
• Removing client information customarily stored on a shared drive; and
• Though likely not a breach, unusual activity like remote, late night or weekend logins will create suspicion.

Next, even if a broker is not actively soliciting firm clients, any retention of firm records will be presumed to be for the purpose of soliciting clients. It should be expected that the former firm will contact the outgoing broker’s former clients, notify them of his/her departure, and ask questions about communications with the departing broker. Below is a non-exhaustive list of conduct that can constitute a solicitation warranting legal action:

• Contacting clients after termination and asking them to leave the old firm and transfer to the broker’s new firm;
• Advertising competitive services/rates/structures directly to former clients;
• Denigrating the old firm to former clients;
• Inaction on client requests during employment that would further client’s business with the old firm and take away from a potential transfer to the broker post-termination;
• Informing clients pre-resignation about impending departure; and
• Unusual meetings and phone calls with clients immediately prior to resignation can create red flags.

Recommendation

Determining what types of pre- and post-termination conduct is permissible is dependent on the outgoing broker’s employment agreement with the firm. To further complicate the issue, firms tend to require their brokers to sign multiple agreements over the years of employment (think joint production agreements, joint advisor agreements, codes of conduct) that quietly update, tweak and broaden restrictive covenants.

By way of example, a recent hot-button issue is whether outgoing brokers can contact former clients post-termination to inform them of their new employment or make informational announcements regarding their whereabouts on social media outlets like LinkedIn. Whether this conduct constitutes a solicitation depends on the provisions of the employment agreement(s). Even though FINRA Rule 2140 prohibits interfering with a customer’s request to transfer an account to the broker of their choice, firms are still trying to use contract provisions designed to make it difficult for existing clients to find the departing broker.

We recommend brokers considering a departure seek advice and direction from an experienced attorney before announcing their resignation to anyone. Brokers should have their agreements reviewed and closely analyzed by an attorney. The non-protocol firms are filing legal suits on a monthly basis. A competent attorney should be able to assess how the courts in your jurisdiction have recently handled TROs filed by the non-protocol brokerage firms and formulate a game plan for a smooth departure and peaceful transition. 

Endnotes