Who Owns The Customer? Open Letter to FINRA Board from Bill Singer Esq

January 8, 2018

An Open Letter to the
Financial Industry Regulatory Authority
Board of Governors:

Chairman and Public Governor: William H. Heyman / The Travelers Companies, Inc.

FINRA CEO: Robert W. Cook

Public Governors

Carol Anthony (John) Davidson / Retired

Shelly Lazarus / Ogilvy & Mather

Joshua S. Levine / Kita Capital Management, LLC

Brigitte C. Madrian / Harvard Kennedy School of Government

Eileen Murray / Bridgewater Associates

Charles I. Plosser / Former President and CEO, Federal Reserve Bank of Philadelphia

Hillary Sale / Washington University in St. Louis School of Law

Leslie Seidman / Former Chairman of the Financial Accounting Standards Board

Luis M. Viceira / Harvard Business School

Elisse B. Walter / Former Commissioner and Chairman of the Securities and Exchange Commission

Susan Wolburgh Jenah / Former President and CEO of the Investment Industry Regulatory Organization of Canada

Industry Governors

Stephen M. Cutler / JPMorgan Chase & Co.

Andrew S. Duff / Piper Jaffray

Stephen A. Kohn / Stephen A. Kohn & Associates, Ltd.

Brian Kovack / Kovack Securities, Inc.

Joseph M. Mecane / Citadel Securities

Robert A. Muh / Sutter Securities, Inc.

Kathleen A. Murphy / Fidelity Personal Investing

Joe Romano / Romano Wealth Management

John W. Thiel / Merrill Lynch Wealth Management

Amy L. Webber / Cambridge Investment Research, Inc.

As reported in "Finra to Breakaway Brokers, Firms: Fight It Out" (Barron's, Jan. 5, 2018) https://www.barrons.com/articles/finra-to-breakaway-brokers-firms-fight-it-out-1515185626 :

Finra is apparently going to let brokerages and breakaway brokers fight it out over the issue of who owns the client.

A spokeswoman for the regulator tells FinancialAdvisorIQ that it takes no position on the debate, and adds that Finra isn't involved in the broker protocol. Finra has arbitration rules to handle disputes, but no who-owns-the-customer rule.

Similarly, as reported in "Finra Refuses to Get Embroiled in 'Who-Owns-the-Customer' Debate" (Financial Advisor IQ, January 5, 2018) http://financialadvisoriq.com/c/1843923/211733 :

Finra isn't going to intervene in the "who-owns-the-customer" debate that's resurfaced in the financial advisory industry because of the three high-profile exits of Morgan Stanley, UBS and Citigroup from the Protocol for Broker Recruiting.

The broker protocol "is an agreement between the firms, so Finra is not part of it," a Finra spokeswoman tells FA-IQ in reaction to suggestions received by the publication about the regulator's role in defining who owns the customer - the broker-dealer firms or the advisors.

The spokeswoman adds that Finra doesn't have a position on this particular debate.

FA-IQ's straw poll of advisors shows 91% believe they themselves own the customers, their account information and the right to service their assets. The rest believe the firm owns them.

The preamble to the "Protocol for Broker Recruiting"
 states the following:

The principal goal for the following protocol is to further the clients' interests of privacy and freedom of choice in connection with the movement of their Registered Representative ("RRs") between firms. If departing RRs and their new firm follow this protocol, neither the departing RR nor the firm that he or she joins would have any monetary or other liability to the firm that the RR left by reason of the RR taking the information identified below or the solicitation of the clients serviced by the RR at his or her prior firm, provided, however, that this protocol does not bar or otherwise affect the ability of the prior firm to bring an action against the new firm for "raiding." The signatories to this protocol agree to implement and adhere to it in good faith.

When RRs move from one firm to another and both firms are signatories to this protocol, they may take only the following account information: client name, address, phone number, email address, and account title of the clients that they serviced while at the firm ("the Client Information") and are prohibited from taking any other documents or information. Resignations will be in writing delivered to local branch management and shall include a copy of the Client Information that the RR is taking with him or her. The RR list delivered to the branch also shall include the account numbers for the clients serviced by the RR. The local branch management will send the information to the firm's back office. In the event that the firm does not agree with the RR's list of clients, the RR will nonetheless be deemed in compliance with this protocol so long as the RR exercised good faith in assembling the list and substantially complied with the requirement that only Client Information related to clients he or she serviced while at the firm be taken with him or her. . .

The Protocol for Broker Recruiting is a document drafted by management in an effort to constrain the post-employment conduct of former employees. No registered representative is a signatory to the Protocol. No public customer is a signatory to the Broker Protocol. Accordingly, in my opinion, the Broker Protocol's assertion that its "principal goal" is to "further the clients' interests of privacy and freedom of choices" is self-serving nonsense. Not that I have an opinion about the issue.

Notwithstanding its flaws, the weakening and possible demise of the Broker Protocol will inevitably return the FINRA community to:

  • customer-retention-via-litigation,
  • employment and post-employment intimidation tactics employed by employers seeking to hamper and deter competition by former employees, and
  • cynical delays in undertaking the timely transfer of customer accounts to a competitor firm.
Renewed hostilities about who owns customers returns our industry to a crossroads, or perhaps more aptly put, to the demarcation of a minefield. The imminent challenge before us manifests itself in many forms, among which are the:

  • ongoing migration of FINRA member firms from the broker-dealer model to that of registered investment advisory;
  • transition from commission-based stockbroker compensation to salaried; and
  • diminishing professional stature of the industry's registered men and women by devolving their roles into mere customer service reps.
Although we may argue whether FINRA should have interceded into this debate years ago and whether the Broker Protocol was doomed to failure (as I have long suggested), such musings are an academic discussion for another time and place. Right now, Wall Street is in a struggle for the hearts and minds of the investing public and of the industry's hundreds of thousands of men and women employees. In response to the weakening of and the demise of the Broker Protocol, I am quoted in the Financial Advisor IQ as saying that:

Finra needs to convene an industry conference to finally be able to decide on what's a workable definition of who owns the customer . . . there's got to be a better way of doing this than TROs and arbitration.

In response to this existential threat, an unidentified  "Finra spokeswoman" says that the "who owns the customer" issue and the Broker Protocol are little more than a pedestrian "agreement between the firms," which renders the issue something that FINRA is "not part of," and something about which the industry's self-regulatory-organization "doesn't have a position on."

Does that purported unidentified FINRA spokeswoman speak for FINRA's Board of Governors?

Were you Governors informed of the developing renunciation of the Broker Protocol by some of its most important signatories -- and were you polled as to the self-regulatory-organization's now public position of not having a position on the issue?

Are you Governors aware that if past is prologue, that the inevitable result of ending the flawed but somewhat utilitarian industry understanding in the form of the Broker Protocol will be an increase in litigation -- which traditionally sidesteps mandated intra-industry arbitration and plays out amid the clamor for restraining orders and injunctions in state and federal courts?

Is a return to time-consuming and expensive civil litigation truly the direction in which the FINRA Board of Governors wishes to steer the FINRA member community?

Contained on the "About FINRA" webpage of your organization is, in part, this high-minded and laudatory mission statement:

FINRA is dedicated to investor protection and market integrity through effective and efficient regulation of broker-dealers.

FINRA is not part of the government. We're a not-for-profit organization authorized by Congress to protect America's investors by making sure the broker-dealer industry operates fairly and honestly.

Dedicated to investor protection and market integrity. Operating fairly and honestly. In light of those mandates, explain to  me, then, why the FINRA Board of Governors is not involved in the issue of "who owns the customer" and doesn't have a "position" on such a critical investor protection and market integrity issue? If you have not been briefed on this issue and polled as to your desires, then why is a spokeswoman speaking on your behalf? The rank hypocrisy with FINRA's hasty retreat to the sidelines is further highlighted by considering your most fundamental rule:

FINRA RULE 2010: Standards of Commercial Honor and Principles of Trade

A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.

This most elastic and rubbery of the self-regulator's rules covers varied examples of misconduct. There's quite a bit of stretch to the fabric of this rule, and FINRA is unapologetic about hauling it out whenever and wherever the regulator sees fit. I would ask you Governors to answer a simple question: What is more important when applying notions of observing high standards of commercial honor and just and equitable principles of trade than ensuring that customers and their confidential information are handled in confidence and with dignity and respect?

During my 36-year career on the Street, I have been a Series 7 and 63 registered representative, worked in-house in the Legal Department at a major broker-dealer and as Legal Counsel to an investment advisor/mutual fund complex. I have also been a regulatory lawyer at two self-regulatory-organizations. In my time in private practice, I have represented public customers, industry firms and individuals, and whistleblowers. I am proud of my role in helping to create both the NASD and FINRA Dissident and Reform Movements and to have been among the slate of the first four candidates to contest Board seats in 1998. As such, I have sat at all sides of the table, represented all sides of the issues, and have prosecuted as well as defended misconduct. It is from that panoramic vantage point that I view FINRA's refusal to resolve the "who owns the customer" debate as a shameful disservice to both the investing public and the industry.

Who owns the client? Why is that such a difficult question for FINRA to answer? Let me illuminate you: The client owns his or her account and all attendant confidential information. The FINRA community -- be it member firms or their associated persons -- exists only to serve the needs of customers. There . . . you see . . . not such a tough question to answer!

Public customers approach opening a brokerage account from many avenues. Some are prompted by television ads, some by a desire to develop an intimate financial counseling relationship with a specific stockbroker, and, yes, some may well rely upon the reputation and stature of the broker-dealer. It is the same mixed-bag of considerations involved when we choose lawyers, medical professionals, accountants, and undertake to establish important business and personal relationship of many types. It's a little bit of who you will actually be dealing with after you sign on the dotted line and a little bit of the organization with which you will be dealing. Some will opt to place more weight on the banker than the bank or the hospital than the surgeon or the lawyer than the law firm . . . the list and choices are endless. Paramount to everything, however, is the fact that the choices of where to open an account and when to close it are the customer's. Similarly, the free flow of commerce and the benefits of competition require that the customer's best interests are not fettered by rules, regulations, and protocols that inappropriately delay the closing or transferring of an account and that interfere with the customer's desire to choose whichever stockbroker or brokerage firm is deemed best.

Given Wall Street's lamentable record of consumer fraud, we must not place undue obstacles in the way of men and women who learn of misconduct at their employer (or are pressured to engage in wrongful activities) and are compelled to quickly sever relationships with their employers in order to protect their careers and their customers. In constructing any agreements among firms, sometimes industries impose significant prior notice requirements and overly-complicated procedures in order to retard the departures of customers and employees -- with the intent to make employees think twice before activating such an onerous protocol. Such policies may make business sense but may also come with hidden compliance and regulatory costs. As a Wall Street self-regulatory-organization, FINRA's self-professed mission statement is investor protection, market integrity, high standards of commercial honor, and just and equitable principles of trade. In considering the desires of its member firms to hamstring employee departures and retain customer accounts, FINRA must always act as a regulator and not as an agent of its broker-dealers or as their accessory or facilitator.

In conclusion, the Broker Protocol is a self-serving agreement negotiated among  employers/management and imposed without benefit of bargaining upon employees/labor and foisted upon equally disenfranchised public investors. There is no place for such fiat within self-regulation --- except, you know, the FINRA Board of Governors sat in silence as its large member firms sliced and diced control of public customers among themselves and then forced the convention upon their employees, smaller firms, and customers. Now, as that private agreement dissolves, the Board again gives silent assent. In resolving "who owns the customer," FINRA's role is not that of a combatant but as the protector of the public investor and the industry. As members of the Board of Governors, your role is to act when your intervention is necessary, and this is such a moment in time. For once, assert your independence and protect the public and the industry. No one is asking you take sides. Embrace the task of corporate governance and do your job.


Bill Singer, Esq.