A Rep's Guide to Leaving The Firm and Setting Up Shop Elsewhere

A Rep's Guide to Leaving The Firm and Setting Up Shop Elsewhere

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eps frequently ask us about their rights as well as their responsibilities as they prepare to terminate their employment with their current firms. Reps want to know what they can do, while still employed, to compete with their current employer.

Preliminarily, let me emphasize that a complete analysis of a rep's obligations must include examining and opining on the legitimacy of any covenants not to compete contained within employment agreements. Court opinions as well as state statutes may permit, limit or bar the enforceability of a particular covenant not to compete. As the cases are far too individualized and fact-intensive for analysis here, reps will need to retain competent securities industry counsel for advice. To make matters more complicated, the law varies from state to state. For this article, I will assume that a covenant not to compete does not exist.

The first point for reps to know is that, until resignation, reps owe their current firms a fiduciary duty. That fiduciary duty is rooted in agency law. A rep is an agent of his firm, the principal. The fiduciary duty includes a duty of loyalty, and that duty of loyalty extends to all matters within the scope of the rep's employment.

One consequence of that duty of loyalty is that reps, while still employed, cannot contract to employ other employees of the firm. However, after terminating employment, the rep is free to enter into such contracts with his former firm's employees.

Another consequence of the duty of loyalty is that reps cannot compete with their current firms. Nonetheless, there are a host of actions that reps can take without breaching their duty of loyalty. In a nutshell, it is permissible for reps to engage in preliminary competitive activities. Put another way, reps are allowed to prepare to compete.

Accordingly, in advance of their resignation, reps can form a rival corporation. That would include preparing articles of incorporation and other corporate documents, applying for a tax identification number, and applying to be licensed with federal and/or state securities regulators. Additionally, permissible activities would include leasing office space, obtaining financing, purchasing or leasing equipment, ordering supplies such as stationary, and anything else necessary or desirable to outfit the operation for business. Reps also can hire employees for the rival business if those employees are not associated with the rep's current firm, and if those employees do not perform activities to compete with the rep's firm. Finally, reps can consult (and absolutely should consult) a securities industry attorney to navigate through the transition process.

Another consequence of the duty of loyalty is that reps, while still employed with their current firms, cannot solicit customers for the rival business. But once the rep resigns, there is no prohibition against soliciting customers. Thus, the common practice among reps is to terminate employment on a Friday afternoon, followed by a long weekend of solicitation efforts. Those efforts typically include contacting customers as well as sending announcements and ACAT forms.

Reps need to plan the transition process months in advance to ensure as smooth a transition as possible. The first step is to seek legal counsel. Then prepare to compete!

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James J. Eccleston is a securities attorney, representing customers as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat, Filipowski & Eccleston, and can be reached at 312-621-4400.