The plethora of litigation arising from recruitment issues in the financial services sector \u2014 representing a cottage industry and almost a sport \u2014 will not subside until there are clear rules and guidelines for dealers and sales representatives.
The issues are many and complex. They involve:
> restrictive terms in employment and agency agreements governing solicitation of clients and fellow sales representatives;
> pre-departure conduct;
> notice of termination;
> notice to clients;
> bonuses and forgivable loans provided to recruits based on the transfer of assets under administration;
> a recruiting dealer\u2019s policies and practices; and
> post-departure conduct, including competitive acts and confidentiality obligations.
Frequently, industry customs and practices are in conflict with contract and employment law. In the fight for client assets under administration among dealers, departing sales representatives and their recruiting dealers, where do clients\u2019 rights and registrants\u2019 regulatory obligations to clients fit in?
Should a sales representative be required, as a term of his or her licence, to give a fixed period of notice prior to departure? Or is the present custom, which is to give no prior notice or warning of termination, optimal?
Prior to departure, and particularly during a notice period, what is permissible conduct for dealers and advisors? For example, can the dealer be allowed to sideline the advisor and pursue the book of business? Can the advisor solicit clients to transfer their accounts to his or her new dealer while still employed or associated with the old dealer?
What post-departure conduct is appropriate regarding solicitation of clients and use of confidential information, and what information and documents can advisors take with them from the original dealer? Whole-branch departures are particularly problematic, particularly when the branch manager personally owns, or is the tenant, of the branch premises. The loss of an entire branch leaves the original employing dealer without the immediate means and ability to attempt to retain the branch\u2019s client base.
Branches, including the branch manager, frequently market themselves to recruiting dealers as an all-or-nothing proposition to maximize recruiting bonuses and ensure continuity in the transition from dealer to dealer. The British Columbia Court of Appeal recently set aside a B.C. Supreme Court finding that imposed a duty on departing sales representatives and their branch manager in the context of a whole-branch departure to \u201ccompete fairly.\u201d The case is now going to the Supreme Court of Canada.
In my view, there should be a comprehensive code of conduct that forms part of a registrant\u2019s \u2014 both dealer and advisor \u2014 licensing conditions, the breach of which would constitute \u201cconduct unbecoming\u201d and be subject to regulatory sanctions. The reason for the imposition of a code as part of the regulatory scheme is that the interests of clients dictate that their confidential information and their right to receive continued service at a high level be the paramount consideration, rather than clients being fought over by parties for whom they appear to be no more than a piece of property.
Recent judicial decisions, noting the regulatory duties imposed on both dealers and sales representatives to clients, have factored into these decisions this client-centric focus. However, each decision is limited, by the nature of our civil justice system, to the facts of that particular action and the particular issues arising from the events and relationships between the parties; therefore, a comprehensive code of conduct cannot be judicially created.
For whatever reason \u2014 most probably that dealers act as recruiters and are themselves poaching grounds \u2014 there is unlikely to be a grassroots dealer- or sales representative-led initiative. That leaves the regulators to lead on this issue by establishing a code of conduct expected of all registrants and forming part of their regulatory obligations.
If there is an expectation that sales representatives give reasonable notice of their departure (rather than the customary Friday afternoon \u201cI just stopped by to say goodbye and hand in my resignation letter\u201d), then there should be a corollary expectation that dealers treat departing sales representatives fairly during the notice period. That means not sending the sales representative home and forbidding contact with his or her clients during the notice period.
Clients should not be faced with a competitive scrum for their accounts from their sales representatives and dealers, but should receive a joint notice advising them of the impending change and of their options.
@page_break@Regulators have traditionally been loath to become involved in this area. However, allowing the courts to lead and essentially dictate changes in the industry is not the essence of self-regulation. Clear and fair regulatory rules would serve to provide clarity to the industry and impose a client-centric focus that is all too often lacking in the unseemly fight over client assets.\t
Joel Wiesenfeld is a partner at Torys LLP in Toronto. The views expressed in this commentary are strictly his. <\/i>
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