A recent ruling by a federal judge in Indianapolis could make it easier for financial advisers who switch firms to tell clients about the move without fear of legal consequences.
The case involves the financial firm Edward Jones, which sued broker John Kerr on Sept. 6 in U.S. District Court in Indianapolis. Kerr, who had worked as a financial adviser for Edward Jones in Westfield since July 1998, left that job on Aug. 1 to join Thurston Springer Financial in Indianapolis.
On Nov. 14, Senior Judge Sarah Evans Barker denied Edward Jones’ request for a temporary restraining order and preliminary injunction that would have barred Kerr from contacting his former Edward Jones clients until the matter could be handled in arbitration through the Financial Industry Regulatory Authority, or FINRA.
The FINRA arbitration is still pending.
Edward Jones had argued that Kerr violated his employment agreement when, a day before leaving the firm, he “actively and deceptively printed, copied, and/or removed Edward Jones’ customer files, confidential records and/or trade secrets and took them with him after his employment ended.”
Among other things, the agreement prohibits Kerr from directly or indirectly soliciting Edward Jones’ customers for a year after his departure from the firm.
In his legal response to the suit, Kerr said he was forced to resign at an Aug. 1 meeting with Edward Jones’ human resources department in St. Louis, and that the resignation was related to “an on-going dispute” with his longtime office administrator.
Kerr said he printed three lists to take with him to the meeting, but those lists did not include client contact information and he has since destroyed the lists.
After leaving Edward Jones, Kerr said, he followed “standard industry practice” by contacting his clients to let them know he had moved to Thurston Springer. Kerr’s legal response includes affidavits from eight clients who followed him to his new firm but said Kerr did not solicit them to do so.
In her ruling, Barker sided with Kerr. Financial advisers can be prohibited from soliciting clients when doing so would violate their employment agreements, the judge wrote, but they should not be prohibited from communicating with clients about a change in firms.
“Consumers are entitled to know when their trusted financial advisers will no longer be available to serve them,” Barker wrote.
Further, the judge noted, Edward Jones instructs its new brokers to call former clients to notify them about the broker’s change to a new firm — the same action it objected to in Kerr’s case.
“Edward Jones’s insistence in characterizing Mr. Kerr’s actions as inconsistent with standard industry practices seems more adversarial than rational,” Barker wrote.
The firm issued a brief written statement in response to an IBJ query on Tuesday. “Edward Jones is disappointed in the outcome of the court proceedings. Further proceedings will now take place in arbitration before FINRA,” the statement said.
Edward Jones did not respond to a question about whether it plans to appeal the judge’s order.
The ruling is significant because it’s not the norm. Judges typically grant firms’ requests to prohibit their former brokers from contacting clients, said Thurston Springer’s general counsel, Brian Sweeney.
“This is the first time we have a rebuke saying that a contact is not a solicitation,” Sweeney said.
Barker’s order will set legal precedent in the Southern District of Indiana, Sweeney predicted, and the thoroughness of the 28-page order will attract notice from judges in other jurisdictions as well. “This will be given a lot of respect,” he said.
Indianapolis securities attorney Mark Maddox, who is not involved with this case, agreed that the ruling is likely precedent-setting, although he believes Edward Jones will appeal the decision.
The opinion may make brokers feel more comfortable contacting clients to let them know about a change in firms.
“I think it’s going to level the playing field a little bit for departing brokers,” Maddox said. “I think what’s significant about the case is that brokers, like the Edward Jones brokers here, now seem to have an argument from a federal court judge.”
Kerr did not immediately return a call for comment from IBJ on Tuesday morning.