Investment adviser professionals leaving a firm to transition to another or to form an independent practice is a common occurrence in the financial services industry. However, while common, a career transition requires careful, sequential planning.
Assess → Plan → Resign → Transition
This should start with a thorough review of employee contractual obligations, a strategic transition plan, and discipline before and after resignation to avoid potential litigation. Failing to do so can lead to allegations by previous employers.
- Developing Your Transition Plan
A solid transition plan should include two practical questions:
- What can I do before I resign?
- What needs to wait until after resignation?
The remaining questions must be considered alongside the employment contract, state laws, and other legal and regulatory considerations.
For example, a departing adviser can face litigation or other legal consequences for improperly soliciting clients, taking confidential information, competing while still employed, failing to satisfy contractual obligations, or overlooking financial obligations to the former firm.
Thus, one of the first steps is to assess your agreements and attestations with your current employer. Reviewing the employment agreement is important and should be a key factor in any transition plan. Comprehensive review and understanding of contractual obligations to the employer can identify the factors that could affect departure, including confidentiality, client solicitation, restrictive covenants, notice requirements, compensation, and more.
Next, you should engage counsel to plan:
- When can I form the new entity?
- When can I begin preparing regulatory filings?
- What client information can I legally retain or use?
- When can I communicate with clients?
Counsel can address these questions and help to then provide important guidance for your transition and resignation.
- Consider Notice and Termination Requirements to Avoid Potential Claims
A frequently overlooked provision is the contractual notice requirement.
Employment agreements, independent contractor agreements, shareholder agreements, adviser agreements, and partnership agreements often require a professional to provide a particular number of days’ notice before termination. They also may prescribe how notice must be delivered, for example, in writing, via email, personal delivery, or overnight delivery to a designated address.
A departure that does not comply with these requirements can create an unnecessary breach-of-contract claim.
Moreover, the departing adviser may remain obligated to perform services, protect confidential information, assist with transition matters, return firm property, and comply with restrictions on outside activities. In some circumstances, the employer may also have contractual rights concerning compensation, benefits, and repayment of loans during the notice period.
The timing of the resignation can therefore affect the entire transition plan.
For example, if an adviser provides 30 days’ notice, is the adviser able to establish a new entity without violating contractual and regulatory obligations? If so, how is this done? When can you start communicating with clients about a transition? And how? The answer may depend on the specific agreement, applicable state law, and the circumstances of the transition.
Many employment agreements also contain provisions related to non-solicitation of clients, employee non-solicitation, confidentiality, and similar post-employment restrictions. The enforceability and scope of these provisions can vary significantly depending on applicable state law. California, for example, has particularly restrictive laws concerning employee non-compete agreements, but that does not mean other contractual obligations such as confidentiality and protection of trade secrets can be disregarded.
- Transition
As you embark upon your transition it is critically important to understand what information you can and cannot take with you.
a. Determining Permissible Client Information
What kind of client information and advisor can take is often where a transition becomes contentious.
For those advisors who have an independent contractor relationship with their firm, generally the advisor can take copies of client records with them.
However, for those advisors who are W2 employees, the clients are often captive to the firm, and an adviser cannot personally take the firm’s client files, CRM records, account information, financial plans, and/or internal notes, unless agreed upon, and typically subject to an agreement or conditions (such as purchasing the client account as assets).
Particular caution should be exercised with client lists, account numbers, financial statements, holdings, risk profiles, internal notes, performance information, and other confidential or proprietary information.
If the firm is a member of Broker Protocol and protocol applies, its protections should also be understood; see https://jackolg.com/insights/what-transitioning-advisors-need-to-know-about-broker-protocol/
The Protocol applies to participating firms and permits departing registered representatives to take only certain limited client information. It is not a general authorization to download client files or records.
b. Client Communications
Before contacting clients, it is important to confirm when communication is permitted, what information may be used, what may be communicated, and whether the employment agreement or applicable law imposes restrictions.
c. Financial Obligations and Debts to Former Employer
Sometimes, disputes can arise when financial obligations have not been met, especially as resignation may trigger repayment or forfeiture obligations. For transitioning RIAs, reviewing and settling obligations, or making arrangements is key to avoiding dispute and possible litigation.
Transitioning from one firm to the other is an exciting time, but the goal is to leave without giving the former employer a roadmap for litigation.
Conclusion
For advisers considering a move to another firm or establishing an independent practice, early legal and regulatory guidance can help identify potential issues before they become transition disputes. Reviewing employment agreements and other contractual obligations, understanding what information can be retained, and when and how client communications can occur, should be part of the transition process.
A carefully planned transition helps advisers Assess → Plan → Resign → Transition while protecting their professional interests and reducing the risk of avoidable claims.
Author: Dharmi Mehta, Junior Partner, Jacko Law Group, PC (“JLG”).
JLG works extensively with investment advisers, broker-dealers, investment companies, private equity and hedge funds, banks and corporate clients on securities and corporate counsel matters. For more information, please visit https://www.jackolg.com/.
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