Labor & Employment Law

Broker Transfer Tactics Get SEC Scrutiny

By Dobin & Jenks

The Securities and Exchange Commission has issued an Order Instituting Administrative Proceedings against Next Financial regarding Next's transition practices. The SEC has alleged a violation of Regulation S-P regarding customer privacy. It is strange to see the SEC get involved in recruiting matters, but there's a twist here that should have been obvious, but apparently wasn't.

According to the SEC, Next has a "transition team" whose responsibility it was to help new brokers join the firm. No problem there. Next's team had a spreadsheet which the incoming brokers were supposed to fill out. The spreadsheet asked for more information than is necessary to facilitate a transfer, but still no big deal.

So why is the SEC involved? According to the filing, Next employees would access the "losing" firm's computer system and access their customer records. How did they accomplish this? Using the usernames and passwords of the incoming brokers, that's how. Did anyone at Next think this was appropriate? Of course it wasn't. A monkey living in a tree would know that this was inappropriate.

There are areas in the recruiting venue where the SEC has been the equivalent of the piano player in a bordello "You mean this is a house of ill-repute?" Customer information has moved between firms for years and years. This is the way business has been done. Next, as far as getting this information from its recruits in anticipation of their arrival, was doing nothing out of the ordinary.

Accessing another firm's computer system is a whole different story. There are legal implications that are far greater than just a Regulation S-P violation, such as legislation, Federal and State, protecting firms against unauthorized use of their computers by outsiders or hackers. In law school we were taught that bad cases make bad law. This could be a bad case and the fallout could affect the entire securities industry.

That's the view from The Law Planet - Jupiter, Florida.

Full post as published by The Law Planet Blog on September 24, 2007 (boomark / email).