Investment Management

Archive for November 2017

Posted on Monday, November 27 2017 at 5:46 pm by

Another Shoe Drops: UBS Withdraws from the Broker Protocol

By Paul Foley, John I. Sanders, and Lauren Henderson

Only one month after Morgan Stanley withdrew from the Protocol for Broker Recruiting (the “Protocol”), a second major brokerage firm has announced its intention to withdraw effective December 1st. UBS says it is withdrawing as part of a strategy to focus on retaining its current brokers instead of recruiting brokers from competitors. [i] Still, many observers believe Morgan Stanley’s and UBS’s withdrawals are meant “to stanch the flow of brokers and client assets.”[ii] This flow, of course, has quickened in recent years as advisers have left traditional, large brokerage firms to form independent advisory firms.[iii]

When Morgan Stanley withdrew from the Protocol, many speculated as to whether the Protocol would survive.[iv] Such speculation has only increased as sources have confirmed that Morgan Stanley’s withdrawal was the catalyst for UBS’s departure.[v] We expect more firms are currently considering how to respond to two of the largest brokerage firms withdrawing from the Protocol, and we would not be surprised to see similar announcements before year-end.

If you have questions about the recent withdrawals from the Protocol or general questions about the complexities that arise in establishing an independent advisory firm, please feel free to contact us directly.

Paul Foley is a partner with Kilpatrick Townsend & Stockton’s Winston-Salem and New York offices. John I. Sanders and Lauren Henderson are associates based in the firm’s Winston-Salem office.

[i] Lisa Beilfuss, UBS to Pull Out of Pact on Broker Recruiting, WALL ST. J., Nov. 27, 2017, available at https://www.wsj.com/articles/ubs-to-pull-out-of-pact-on-broker-recruiting-1511799020 .

[ii] Id.

[iii] Neil Weinberg, Broker Protocol Reduced to a Sell Game, OnWallSteet, Oct. 18, 2016, available at https://www.onwallstreet.com/news/broker-protocol-reduced-to-a-shell-game.

[iv] Lisa Beilfuss, Morgan Stanley to Exit Accord on Broker Recruiting, WALL ST. J., Oct. 30, 2017, available at https://www.wsj.com/articles/morgan-stanley-to-exit-accord-on-broker-recruiting-1509380038

[v] Beilfuss, supra note 2.

Posted on Friday, November 17 2017 at 8:38 am by

SEC Announces Enforcement Results, Sets New Priorities

By Paul Foley, John I. Sanders, and Lauren Henderson

On November 15, 2017, the SEC announced the results of its enforcement actions for fiscal year 2017 and stated its enforcement priorities for fiscal year 2018.

During fiscal year 2017, the SEC brought 754 enforcement actions, returned $1.07 billion to harmed investors, and obtained judgments and orders totaling $3.789 billion in disgorgement and penalties.[i] Of the 754 enforcement actions, 446 were standalone cases.[ii] Investment advisory issues, securities offerings, and issuer reporting each accounted for 20% of the standalone cases, roughly in line with fiscal year 2016 results.[iii]

In the current fiscal year, the following five core principles will guide the SEC’s enforcement actions:[iv]

  • Focus on Main Street (i.e., unsophisticated) investors
  • Focus on individual accountability (as opposed to organizational accountability)
  • Keep pace with technological change
  • Impose sanctions that most effectively further enforcement goals
  • Assess the allocation of resources

Both the enforcement results for the recently completed fiscal year and the stated priorities for the current fiscal year reflect Chairman Clayton’s oft-articulated dedication to the SEC’s mandates: protect investors, maintain fair and efficient markets, facilitate capital formation.

If you have any questions about the SEC enforcement actions or enforcement priorities, please feel free to contact us directly.

Paul Foley is a partner with Kilpatrick Townsend & Stockton’s Winston-Salem and New York offices. John I. Sanders and Lauren Henderson are associates based in the firm’s Winston-Salem office.

[i] SEC, SEC Enforcement Division Issues Report on Priorities and FY 2017 Results (Nov. 15, 2017), available at https://www.sec.gov/news/press-release/2017-210.

[ii] Id.

[iii] Id.

[iv] Id.

Posted on Thursday, November 9 2017 at 11:10 am by

Four Key Takeaways for Investment Advisers from Chairman Clayton’s PLI Address

By Paul Foley and John I. Sanders

On November 8, 2017, SEC Chairman Jay Clayton gave the keynote address at the Practicing Law Institute’s 49th Annual Institute on Securities Regulation.[i] Chairman Clayton’s remarks shed considerable light on the SEC’s priorities in the near-term. We believe there are four key takeaways from the address for investment advisers:

  • The SEC will deemphasize formal rulemaking and focus instead on enforcement actions that will improve “transparency in our securities markets”;[ii]
  • The SEC will scrutinize whether investment advisers’ proxy voting decisions are maximizing value for their clients;[iii]
  • The SEC will prioritize enforcement actions related to “complex, obscure, or hidden fees and expenses that can harm investors” (e.g., investing client assets in a mutual fund share class that charges a 12b-1 fee when a lower-cost share class of the same fund is available);[iv] and
  • The SEC will help investors track bad actors by creating a website with a searchable database of “individuals who have been barred or suspended as a result of federal securities law violations.”[v]

Chairman Clayton is clearly signaling to investment advisers that the SEC, in the near-term, will focus its energy on whether they are making complete and accurate disclosures to their clients.

If you have questions about Chairman Clayton’s keynote address or the regulations that govern investment advisers generally, please feel free to contact us.

Paul Foley is a partner with Kilpatrick Townsend & Stockton’s Winston-Salem and New York offices. John I. Sanders is an associate based in the firm’s Winston-Salem office.

[i] SEC Chairman Jay Clayton, Remarks at the PLI 49th Annual Institute on Securities Regulation – New York, N.Y. (Nov. 8 2017), available at https://www.sec.gov/news/speech/speech-clayton-2017-11-08.

[ii] Id.

[iii] Id.

[iv] Id.

[v] Id.

Posted on Wednesday, November 1 2017 at 8:46 am by

Morgan Stanley’s Withdrawal from the Broker Protocol Shocks the Industry

By Paul Foley, John I. Sanders, and Lauren Henderson

In 2004, the Protocol for Broker Recruiting (the “Protocol”) was established with the goal of furthering “client interest of privacy and freedom of choice in connection with the movement of their Registered Representatives between firms.”[1] The Protocol defined what information a registered representative could take when moving between signatory firms, how that information could be used, and when it could be used.[2] The Protocol has provided brokers and registered representatives important clarity for the past 13 years, which has cut down significantly on litigation associated with moves from one signatory firm to another, including from brokers to investment advisers.

In a letter dated October 24th, Morgan Stanley, one of the largest employers of registered representatives, announced its withdrawal from the Protocol.[3] According to Morgan Stanley, the Protocol is “replete with opportunities for gamesmanship and loopholes” and is “no longer sustainable.”[4] In particular, Morgan Stanley has been frustrated by the ability of talented advisers to take advantage of the Protocol’s terms to establish independent registered investment advisers (“RIAs”) and solicit the clients they served while employed by Morgan Stanley.[5] Still, the firm’s withdrawal is the most significant in the history of the Protocol. Since 2004, more than 1,600 firms have become signatories, and only 100 have withdrawn.[6]

Following Morgan Stanley’s announcement, speculation as to its significance for the investment advisory industry has been rampant. Some are asking whether “Morgan Stanley’s exit from the protocol will usher in its end.”[7] Supporting that speculation is the silence of Morgan Stanley’s largest competitors in response to the withdrawal.[8]

Some large firms may determine that they are able to derive a competitive advantage in recruiting by remaining signatories of the Protocol. However, large firms that decide to withdraw from the Protocol, will likely be forced to offer top talent some of the same post-termination rights found in the Protocol and will experience significantly greater litigation cost. Those rights can be inserted into employment contracts. Alternatively, firms could increase financial incentives to compensate top advisers for the loss of those rights. Either way, this course of action will increase the cost and complexity of maintaining a talented team of advisers.

The more likely scenario is that Morgan Stanley’s withdrawal (and any similar firm’s withdrawal) is likely to hasten, not slow, the flow of advisers from the traditional, large brokerage firms to independent advisory firms. That flow has been so great in recent years that assets under management at registered investment advisers doubled between 2007 and 2015.[9] The most significant change for advisers employed by firms that withdraw from the Protocol is that they will need more sophisticated legal counsel to handle the process of establishing and transitioning to an independent advisory firm.

If you have questions about Morgan Stanley’s withdrawal from the Protocol or general questions about the complexities that arise in establishing an independent advisory firm, please feel free to contact us directly.

Paul Foley is a partner with Kilpatrick Townsend & Stockton’s Winston-Salem and New York offices. John I. Sanders and Lauren Henderson are associates based in the firm’s Winston-Salem office.

[1] Protocol for Broker Recruiting, available at http://www.bressler.com/DE0ED6/assets/files/Documents/Copy_of_Broker_Protocol.pdf.

[2] Id.

[3] Lisa Beilfuss, Morgan Stanley to Exit Accord on Broker Recruiting, WALL ST. J.,Oct. 30, 2017, available at https://www.wsj.com/articles/morgan-stanley-to-exit-accord-on-broker-recruiting-1509380038.

[4] Id.

[5] Neil Weinberg, Broker Protocol Reduced to a Sell Game, OnWallSteet, Oct. 18, 2016, available at https://www.onwallstreet.com/news/broker-protocol-reduced-to-a-shell-game.

[6] Beilfuss, supra note 3.

[7] Id.

[8] Id.

[9] Weinberg, supra note 5.