Investment Management

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 Since 2004, more than 1,600 firms have become signatories, and only 100 have withdrawn.[6]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.

Posted on Monday, October 30 2017 at 8:39 am by

Advisers Trading in Europe or Advising E.U. Clients Must Prepare for MiFID II

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

On January 3, 2018, the European Commission’s sweeping reform, the Markets in Financial Instruments Directive II (“MiFID II”), will become effective. MiFID II applies to firms providing investment services or performing investment activities in the European Union (the “E.U.”).[1] E.U. investment advisers, naturally, will be among those effected. However, U.S. investment advisers who transact in European financial markets or offer investment advice to E.U. citizens through separately managed accounts (“SMAs”), pooled products (e.g., hedge funds), or indirectly through sub-advisory arrangements may be effected as follows:

  • Trading Equities and Derivatives: Under MiFID II, equity trading must occur on regulated markets, multilateral trading facilities, systematic internalisers, or equivalent third country venues.[2] Accordingly, over-the-counter trading of European equities may be severely restricted and the cost of trading certain securities may increase substantially. In addition, derivatives are subject to new reporting requirements and national regulators are empowered to set position limits for certain derivatives.[3]
  • Marketing Separately Managed Accounts: Each U.S. investment adviser must review licensing requirements in each jurisdiction where an E.U. client or potential client resides to determine whether the adviser must establish a branch or obtain a license to do business in the jurisdiction.[4]
  • Marketing Pooled Products: U.S. investment advisers that offer alternative investment funds (“AIFs”) will be governed by the Alternative Investment Fund Managers Directive (“AIFMD”) and jurisdiction-specific private placement rules, not MiFID II, when engaging in marketing activities for an AIF.[5] Likewise, U.S. investment advisers offering Undertakings for Collective Investment in Transferable Securities (“UCITSs”) are not directly subject to MiFID II when marketing a UCITS to E.U. clients, but will be indirectly impacted by MiFID II’s investor protection regime.[6]
  • Providing Sub-Advisory Services to E.U. Firms: E.U. firms subject to MiFID II may attempt to delegate compliance obligations to U.S. investment advisers serving as their sub-advisors. Among compliance obligations likely to be passed to the U.S. sub-advisor are those related to transparency and reporting.[7]

We invite you to contact us directly if you have any questions about the application of MiFID II to U.S. investment advisers.

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] Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on Markets in Financial Instruments and Amending Directive 2002/92/EC and Directive 2011/61/EU, 2014 O.J. (L 173) 349, 374.

[2] Id. at 409.

[3] Id. at 440, 444.

[4] Christopher D. Christian & Dick Frase, MiFID II: Key Considerations for US Asset Managers, 23 The Investment Lawyer. 1, 4 (May 2016).

[5] Id. at 5.

[6] Id.

[7] Id. at 4.

Posted on Thursday, August 31 2017 at 5:45 pm by

DOL’s Proposed Rule Would Extend the Transition Period for Certain Fiduciary Rule Exemptions to July 2019

 By Paul Foley and John I. Sanders

Today, the text of a Department of Labor (the “DOL”) Proposed Rule we have been anticipating for several weeks was made available to the public.[i] The Proposed Rule would “extend the special transition period” for certain components of the Best Interest Contract Exemption (the “BIC Exemption”) and certain other exemptions to the Fiduciary Rule.[ii] Perhaps the most important aspect of the Proposed Rule is that it would maintain the current version of the BIC Exemption, which requires fiduciaries relying on it to merely “give prudent advice that is in retirement investors’ best interest, charge no more than reasonable compensation, and avoid misleading statements.”[iii] In making the proposal, the DOL stated that its purpose was to give the DOL “time to consider possible changes and alternatives” to the exemptions.[iv] If finalized, the Proposed Rule would extend the transition period of the effected exemptions to July 1, 2019.[v]

Please contact us if you have any questions about this article or the DOL Fiduciary Rule generally.

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] DOL, Notice of proposed amendments to PTE 2016-01, PTE 2016-02, and PTE 84-24, 82 Fed. Reg. 41365, available at https://www.federalregister.gov/documents/2017/08/31/2017-18520/extension-of-transition-period-and-delay-of-applicability-dates-best-interest-contract-exemption-pte.

[ii] Id.

[iii] Id. at 41367.

[iv] Id. at 41365.

[v] Id.