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Securities Industry Employment Agreements – Restrictive Covenants

Restrictive covenants in your employment agreement with a financial institution can have profound career implications. However, they are never as simple as the language on the page and must be taken both seriously and in context. Securities lawyer Rob Herskovits has nearly two decades of experience addressing all aspects employment in this unique sector. This video shares insights about restrictive covenants – high value information for both employers and employees.

Transcript – Restrictive Covenants in Employment Agreements Video with Rob Herskovits, Securities Industry Employment Agreements Attorney and Managing Partner Herskovits Law PLLC

Hi, this is Rob Herskovits. What I wanted to talk about today are something called Restrictive Covenants in Employment Agreement. And that's a fancy term, but what it basically means is that when you sign an employment agreement with a brokerage firm, and your employment terminates, you have certain obligations that extend even beyond the term of employment. And two typical restrictions, post-employment restrictions, are an agreement not to solicit customers, and an agreement not to solicit employees of the former firm.

And it used to be that there were tons and tons of litigation where an FA resigned from broker-dealer A and joined broker-dealer B. And what would happen back in the day was that the firms would run off to court, and ask a judge to temporarily restrain the customers from transferring away from them. And then you'd see the next week broker-dealer B would bring the same type of a claim in court against broker-dealer A, and round and round everyone went.

And firms got smart and they said, "Look, I'm suing you, and you're suing me and I'm settling and giving you money and you're settling and giving me money. Why don't we stop all the bickering?" And what they did is they drafted and created something called the Protocol for a Broker Recruiting. And that was an agreement, and it's an existence to this day.

And basically what that agreement says is that if I'm a signatory to this protocol, and an FA of mine resigns in conformity with the protocol, meaning they resign in writing, they submit the resignation letter to a supervisor. And they provide a list of who their customers are, and don't take any information with them that they're not entitled to, to the new firm. They do all those things, then we're not going to run off to court and see any form of a restraint.

So, people call me and they show me employment agreements that contain these post-employment restrictive covenants. Basically, will just say to me, "Look, Rob, is this something that I need to worry about?" The answer as it so often is from lawyers, is that it depends. So let's talk a little bit about what that depends on.

So there are distinguishing factors between a traditional wirehouse firm, like a Morgan Stanley or a Merrill Lynch, in which it falls on the FA's shoulders to generate accounts. And most arbitrators and most courts would say, "Look, the people that are doing business with that firm, really the relationship is with the FA." So the goodwill, et cetera, flows to the FA, and they are entitled to take those accounts with them to their new firm. And that is why you'll see, if you look at the list of the signatories to the Protocol for Broker Recruiting, that it's oftentimes well-known broker-dealers, the types of firms that we would traditionally call wirehouse firms.

But there is a whole other subset of firms, big players in the securities industry, that intentionally do not sign onto the Protocol for Broker Recruiting. And that could be the firms such as a Charles Schwab, or a Fidelity, or a number of banks that have affiliated broker-dealers. So here is the key distinguishing factor. And the question is, "Whose accounts are these?"

And the Schwabs and Fidelities of the world will say, "Look, we are out there spending a gazillion dollars, putting storefront offices for people to come in, because they know the Fidelity name, they know the Charles Schwab name. We spend tons and tons of money advertising our services in all sorts of forms." And people, they would argue, go to Fidelity, and open up an account, not because they have a relationship with any employee of the firm, but because they want the services of Fidelity, to use that example.

And they will oftentimes very, very aggressively pursue these restrictive covenants that they will have FA's sign. Because their basic premise is that, "Look, we assigned accounts to you to service. And for that, oftentimes you were just paid a salary, not even a commission, the way it often works at wirehouse firms. And because of that you are servicing our account and when you leave you take nothing." That would be the position that a firm such as a Fidelity would take in court. And oftentimes they are successful.

And you'll see that if you went through the list of the firms that are members of the protocol, you're not going to see a Fidelity or a Charles Schwab as a signatory firm, because they recognize that you can't, on the one hand sign off on a protocol that says, "Look, our departing FAs can transfer accounts away from us as long as they depart in accordance with this protocol."

They can't sign that on the one hand, and then on the other hand go to a judge and say, "Look, this person has these following restrictions in his employment agreement. And they should be enforced." They'd be inconsistent positions to take. And because of that, there's a clear demarcation between firms that are signatories to the protocol, and firms that are not. And not to overstate this, but I think that is quite frankly a key determining factor in whether or not post-employment restraints really pertaining to solicitation, will be enforced once the FA departs.

There are certainly other types of post-employment restraints that firms, irrespective of whether or not they're signatories to the protocol, would fairly aggressively seek to enforce. And that would be examples where if someone leaves and say downloads onto a thumb drive, confidential, or truly proprietary information from a firm, they're going to very aggressively pursue stuff like that in court if possible, and oftentimes in arbitration as well. And that's for good reason.

Firms spend tremendous sums of money developing these proprietary materials. They can't have it that someone wishes to leave, they're going to take that product to a competing firm and use it for their own personal, financial gain. But the Protocol for Broker Recruiting really has nothing to do with a situation where a former employee decides that they're going to take proprietary data, or documents from a firm. It really is limited in scope, and its limitation pertains to whether or not a departing FA can solicit customers at his new firm.

But issues of restrictive covenants need to be very, very carefully considered, because firms that are intent on enforcing them, generally do so in a fairly aggressive way. And just because you have an arbitration agreement in an employment agreement, does not mean that affirm can't first go to court and seek some type of temporary restraint, and then pursue the claims in arbitration. So these are the matters that require careful analysis from the departing FA and his or her attorney. Certainly happy to discuss the specifics of your matter with you. Thank you for listening.

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Rob was great he helped my partner and I last year get two cases removed from our record that had no merit. You know how the firms are they represent themselves and settle we suffer. Rob represents you and he’s great!! Jeremy