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Arbitration Award Re-Affirms Broker's Employment Rights
ecently an NASD arbitration award re-affirmed the rights that brokers have in dealing with their brokerage firms. We represented the broker and we argued several points discussed in this column over the years. What rights? There are several, and they relate to wrongful termination, accurate Form U-5 reporting and customer ownership.
Wrongful Termination
In our arbitration, we were fortunate that the broker had the foresight to negotiate a "for cause" termination provision in his employment agreement. That altered his "employment at will" status and forced the firm to prove that it had just cause to terminate the broker. All brokers should attempt to negotiate for cause termination provisions into their employment agreements with their firms. Without such a provision, it is more difficult (though not impossible) to argue later, at termination, that rights were violated.
A similar theme is "constructive discharge". According to one federal court of appeals, constructive discharge occurs when an employer "has made working conditions so difficult that a reasonable person would feel forced to resign". In our arbitration, when the broker was away from the office pursuing legitimate business opportunities, the branch office manager allowed another broker to occupy his desk and represent to clients and staff that he had taken over the accounts. As a result, we alleged that he had been constructively discharged by the firm.
Accurate Form U-5 Reporting
Brokerage firms have a duty to accurately report a broker's termination. Indeed, Form U-5 requires a firm representative to "verify the accuracy and the completeness of the information contained in and with this form". In our arbitration, the firm discharged the broker, and the broker's termination required an explanation on Form U-5. Instead of reporting that there had been a "personality conflict" between the broker and his manager (as the manager admitted at the arbitration hearing), the firm represented that the broker had been terminated for "Job Abandonment". Of course, this kind of remark would be most damaging to a broker's career. If untrue, a broker has a cause of action for defamation (also known as libel or slander).
In fact, while one is required to prove actual damages to recover for a defamation claim, there are four special categories of defamation which are so egregious that the law presumes that the victim has been damaged. These are untrue statements regarding: (1) commission of a criminal offense; (2) infection with communicable disease; (3) inability to perform, or want of integrity to discharge duties of office or employment; and (4) prejudicing a particular party in his trade, profession or calling.
Customer Ownership
The question that often arises in broker-employer disputes is whether the broker or the firm has a right to "claim" customers. In most cases the answer is that neither the broker nor the firm has an absolute right to the customers - clients always are free to do business with whomever they wish. Nonetheless, brokerage firms attempt to effectively assert an ownership right in a broker's customer accounts by requiring the broker to sign what typically is referred to as a confidentiality and non-competition agreement. These agreements state that all records of any account, customer, lead or prospect are confidential and belong solely to the firm. These restrictions are often drafted to include even customers who came with the broker to the new firm. When a broker leaves his or her firm, these agreements restrain brokers from contacting their customers, but leave the firm free to actively pursue them. Should a broker attempt to contact his or her clients, firms often seek a restraining order preventing the broker from doing so.
In our arbitration, the broker did not sign a confidentiality and non-competition agreement. Hence, he was not so restrained. All brokers should consider either not signing these agreements or, at least, consulting securities counsel who may assist in negotiations (privately or officially as counsel for the broker) to reduce the scope of the restriction. For example, brokers with a book should exclude all customers whom they bring to the new firm. If possible, the restriction should be limited only to inherited accounts.
Relief Awarded
In our arbitration, the firm attempted to recover up-front money paid to the broker upon hire (which had not yet been "forgiven") despite wrongfully terminating him and defaming him on his U-5! We requested that the firm's claim be denied, and the arbitration panel did so.
The panel also awarded a substantial amount in damages to the broker. While there are several ways to calculate damages, one of the more common is to calculate lost earnings, both for the past and the future (typically 2 to 5 years). Lost earnings can be based upon either assets under management or upon production that the broker actually experienced, with a projected growth rate for assumed future growth. Additionally, it often makes sense t to provide an arbitration panel with another damages option, such as 1% ROA (return on assets) or average production for all brokers at the particular brokerage firm or branch office.
Conclusion
Plan for future contingencies in considering and negotiating employment terms and conditions. Know that it may be possible to negotiate a "for cause" termination provision in employment agreements. Understand how important it is to have an accurate Form U-5. And remember that it may be possible to make restrictive confidentiality agreements and covenants not to compete much less restrictive.
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Sponsored by James J. Eccleston, an attorney representing stockbrokers, financial planners and
investors nationwide in arbitration, litigation and regulatory matters, and a shareholder with the law firm
Shaheen, Novoselsky, Staat, Filipowski & Eccleston
P.C.(www.snsfe-law.com). This Web site contains material
of general interest. It is neither intended to, nor constitutes, either legal advice or investment advice.
Always consult an attorney and/or investment advisor when building and protecting your wealth.
All content Copyright © 2008 Advocate Capital Management, Inc. except where noted. All rights reserved.
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