When Custodians Defame Investment Advisers to Their Clients In Terminating Investment Manager Service Agreements
From the Desk of Jim Eccleston at Eccleston Law:
No doubt, custodians can do business with whomever investment advisers they want. Custodians can terminate their investment manager service agreements for any reason or for no reason at all, just like investment advisers can change custodians for any reason or for no reason at all.
Of course, the custodian must notify clients when the custodian terminates an investment manager service agreement, providing guidance as to next steps and as to what clients may expect through the termination process.
So, the question arises: how should a custodian communicate such a termination to clients of the investment adviser? How much detail can and should be provided?
Recently, we were more than dismayed to consult an investment adviser whose custodian notified his clients in writing that the custodian was terminating his investment manager service agreement. The custodian provided a helpful FAQ -- that was good. However, the custodian also provided a statement of “concerns” to each and every client of the investment adviser – that was very bad. The “concerns” went to the heart of the investment adviser’s reputation, standing in the professional community, and breach of fiduciary duty. The “concerns” implied an egregious sales practice violation normally sanctioned by way of an industry bar.
Put another way, investment advisers should be aware that their custodians have no legal privilege to defame them to their clients. In other words, the defamatory notification of the custodian’s “concerns” finds no “safe haven” as a regulatory filing. Fuel to the fire is added when the custodian makes a sales pitch to clients that they can choose to continue to maintain their advisory accounts at the custodian.
Investment advisers who have suffered at the hands of their custodians with such defamatory notifications should contact Eccleston Law, LLC to discuss their legal options.
