The United States Securities and Exchange Commission (“SEC”) recently announced the issuance of an Order Instituting Administrative Cease-and-Desist Proceedings against Next Financial Group, Inc. (“Next”) for alleged violations of Regulation S-P (Privacy of Consumer Financial Information).
According to SEC Release No. 56316 (August 24, 2007), the SEC alleges that Next violated Regulation S-P by allowing its “registered representatives to take customer nonpublic personal information with them when leaving Next’s employment” without allowing the customer to opt out of such disclosure. Moreover, the SEC alleges that Next aided and abetted the violation of the privacy policies of other firms by encouraging registered representatives leaving other broker-dealers and joining Next to bring nonpublic, personal customer information without proper notice to the client and a reasonable opportunity to opt out of such a disclosure.
In light of this cease-and-desist proceeding, the following precautions are worthy of consideration by a registered representative planning to depart from his or her broker-dealer. (Since registered investment advisers are subject to Regulation S-P, the following suggestions may also be applicable to an investment adviser representative in similar circumstances.)
It should be recognized that if a registered representative or IAR is affiliated with an existing broker-dealer or investment adviser firm that claims a proprietary interest in the clients served by the registered representative or IAR, the solicitation of clients to release non-public, personal customer information while the registered representative or IAR is affiliated with the existing broker-dealer or investment adviser firm could violate a common law duty of loyalty to an employer/principal or restrictive employment covenants previously agreed to by the registered representative or IAR. A departing registered representative or IAR should consult with an attorney.
With respect to broker-dealers and investment adviser firms, the following are a few of the strategies that should be considered in the context of this cease-and-desist proceeding involving Regulation S-P:
- Train recruiters, transition specialists and operations support staff of the broker-dealer or investment adviser firm’s policy prohibiting such use as described as above.
- Instruct incoming registered representatives or IARs of the new firm’s policy. This training should be documented by the broker-dealer or investment adviser firm in a contemporaneous note or checklist.
Finally, it’s important to recognize that trade secrets, confidentiality obligations and non-solicit restrictions also should be factored in establishing a policy for the broker-dealer or investment adviser firm or determining the permissible activities for a departing registered representative or IAR.