Labor & Employment Law

SEC Seeks To Change Broker Transfer Procedures

By Dobin & Jenks

Since time immemorial, brokers who left their prior firms have taken copies of customer information. In the "old days", brokers copied their holding pages, new account forms and last monthly statements of their customers. With the advances made in the industry, a broker only needs a customer name, address, account number and phone number to accomplish the transfer. Sure, there's plenty of other data, but it's not needed to effect the transfer. This has been going on since I started as a paralegal in the Prudential-Bache Securities law department in 1983.

The SEC sounds like it wants to change all that. Last month, an administrative law judge held a hearing in a case brought by the SEC against NEXT Financial, a brokerage firm from Texas using the independent contractor model. In that case, the SEC's lawyers maintained that all information is confidential and cannot be transferred without the customer's permission. It is unclear whether this includes names and addresses.

In 2007, we successfully defended two cases brought by major wirehouses against their smaller competitors. In both cases, the firms complained about the transfer of "confidential" information. In both cases, we pointed out the hypocrisy of the argument as those same firms use the same "confidential" information when they recruit from other firms. As I said, this has been going on since time immemorial. The arbitrators in both cases, recognizing that this is the custom and practice in the industry, awarded nominal damages to the wirehouses, not the hundreds of thousands or millions that were sought.

The brokerage industry has been able to deal with this issue, on its own, for years and years. The problem, of course, is that NEXT's alleged conduct was wrong and the firm did not own up to its failings. As we sometimes say in the practice "Bad cases make bad law." From what the SEC alleged, this was a "bad case" and the industry may find itself suffering from its impact.

That's the view from The Law Planet - Jupiter, Florida

Full post as published by The Law Planet Blog on January 21, 2008 (boomark / email).