Carve-Out Provision Plays A Crucial Role in Morgan Stanley Advisor Transition Battle
From the Desk of Jim Eccleston at Eccleston Law LLC:
An employment agreement, including a one-paragraph amendment signed over a decade ago, now is playing a crucial role in ongoing litigation between Morgan Stanley and RBC. The amendment's wording may help a former Morgan Stanley team of advisors retain their clients after joining RBC. The team managed about $600 million in client assets and generated $6 million in annual revenue during their employment at Morgan Stanley.
Morgan Stanley claims that the day after the team resigned, over 300 clients served by the advisors received mailings from the advisors. Morgan Stanley sent a letter to the team's legal counsel demanding that the Martin team not violate their non-solicitation agreements. Morgan Stanley also stated that one of the advisors is not entitled to protection under the carve-out provision.
The team stated that Morgan Stanley senior legal counsel indicated that they "owned" their previous client relationships. Senior legal counsel at the firm told them that "no other Morgan Stanley advisors would solicit, contact, or service our clients if we ever left the firm in the future and that we owned our book of business and relationships.” According to the team, clients covered by the agreement comprise approximately 80 percent of their book of business.
The employment agreement states that for a period of one year following the termination of employment, advisors may not solicit any Morgan Stanley clients "who were serviced by you or whose names became known to you, while in the employ of" Morgan Stanley. The carve-out provision employed by the advisor team arguably overrides traditional language seen in employment agreements. The team added language that states, "upon the termination of employment for any reason, employee may solicit and attempt to solicit, directly or indirectly, those customers whom he/she serviced prior to employment with” Morgan Stanley.
A judge granted Morgan Stanley a temporary restraining order on January 22, and the dispute moved to FINRA arbitration. A panel of three arbitrators will hear both sides' claims and evidence. The dispute highlights the importance of exceptions that permit advisors to keep clients they brought to a firm if they subsequently leave.
According to news sources, attorneys not affiliated with the case praised the team's legal counsel for their foresight in securing the carve-out provision. When the team moved to Morgan Stanley, the firm was a member of Broker Protocol, a pact that permitted advisors to take basic client contact information with them when transferring to a new employer. Morgan Stanley left the protocol in 2017 and has since sued departing advisors, claiming violations of non-solicitation agreements.
Carve-out provisions have existed for years, and they are becoming increasingly more common. The provisions generally are used in non-protocol firms to ensure that advisors can take their clients as long as they pay off their promissory notes.
Eccleston Law LLC represents financial advisors nationwide in their transitions. Please contact us to discuss any issues that you may have.
Tags: eccleston, eccleston law, morgan stanley, transition battle
