The Litigator

THE LITIGATOR

Commentary on Law Affecting Business

The Litigator
AGM :: Affleck Greene McMurtry LLP

THE LITIGATOR

Affleck Greene McMurtry LLP
365 Bay Street, Suite 200  ·  Toronto, Canada
416 360 2800  ·  info@agmlawyers.com  ·  www.thelitigator.ca

Whose book of business is it, anyway? Confusion reigns on ‘ownership’ of investment firm client lists

There are few, if any, legal issues affecting the industry that are more cloudy and less certain than whether clients belong to the investment advisor or to the investment .[1] And there are arguably few issues more important.  An investment firm’s financial bottom line is largely tied to the number of clients and the value of the assets contained in their accounts. Investment firms typically view those clients as clients of the firm.  For an investment advisor, his or her base – or – is a valuable asset that is personally built and cultivated over the advisor’s career, follows the advisor from one firm to another, and is often “sold” to a colleague (usually with the tacit or express approval of the firm) when the advisor retires.  Throw into the mix the fact that it is really up to each to decide whether to follow an investment advisor from one firm to another and you get a difficult mix of competing rights and responsibilities that are often at odds with each other. This mix has been a recipe for litigation that has led to several widely divergent – and even confusing – court decisions on the issue over the past few years.

Probably the most notorious recent battle over investment advisors and the clients that followed them is the ongoing B.C. action relating to the wholesale departure of most of the employees in RBC Dominion Securities’ Cranbrook branch who then joined : RBC Dominion Securities Inc. v. Merrill Lynch.  The of clients to move their business from RBC to Merrill Lynch led to a multi-million dollar trial judgment against both Merrill Lynch and the former RBC employees.  The B.C. Court of Appeal largely set aside that award in a January 2007 decision in which it found, among other things, that the clients had never “belonged” to RBC and thus no flowed to RBC when those clients left.  The B.C. appeal court further found that an investment advisor’s book of business is something built up by the advisor’s own diligence and that it is in the interest of the clients, and the public at large, for an advisor to be permitted to take with him and use his clients’ contact information when moving to a new firm.  The Supreme Court of Canada will hear the appeal from this decision in April 2008.

Cases in the Ontario Superior Court have come down on both sides of the question of who owns an investment advisor’s book of business.  In his 2005 decision in King v. Merrill Lynch, Mr. Justice Smith dismissed a claim by a former Merrill Lynch investment advisor and his assistant for wrongful dismissal and for damages for Merrill Lynch’s retention of his clients following his departure.  In doing so, Smith J. found that the plaintiff’s book of business was comprised of clients that really belonged to Merrill Lynch because, among other things, those clients had opened their accounts with Merrill Lynch, signed agreements with Merrill Lynch and received statements from Merrill Lynch. As a result of this finding, and the fact that he had been dismissed for cause, Mr. King was denied any compensation for the loss of his alleged book of business.

A very different conclusion was reached by the Ontario Superior Court this past October in Clark v. BMO Burns.  In that case, Mr. Justice Jarvis granted judgment in favour of a dismissed investment advisor not only for damages for wrongful dismissal, but also for the loss of his book of business or, more accurately, the loss of his ability to sell his book of business to another advisor upon departing the firm.  In arriving at his conclusion, Jarvis J. referred to the common practice in which retiring advisors sell their book of business to a colleague, subject to the approval of the investment firm.  The plaintiff, Mr. Clark, had already discussed selling his book for as much as $175,000 to another Nesbitt advisor. Jarvis J. found that, in being wrongfully dismissed without notice, Mr. Clark was deprived of an opportunity to finalize such a sale. The judge went further to find that BMO Nesbitt Burns had an implied obligation not unreasonably to refuse to consent to the sale of the plaintiff’s book of business. As such, Mr. Clark was awarded $90,000 for the loss of an asset that, in King v. Merrill Lynch, had been found to belong to the investment firm and not the advisor.  It remains to be seen what the result will be on the appeal that will most likely be launched from this decision.

The courts’ past treatment of investment advisors’ books of business leaves the question of who owns such valuable assets very much up in the air.  It is by no means certain that the pending Supreme Court of Canada appeal in RBC Dominion Securities Inc. v. Merrill Lynch will clarify the matter or that this issue can be clarified given the diversity of arrangements that exist in the investment industry among advisors, firms and their clients.

The solution?  Probably the best way for investment advisors and firms to ensure certainty and protect themselves is by entering into clear and enforceable contractual terms dealing with ownership of books of business and the right of departing advisors to solicit their existing clients or their obligation to refrain from doing so. Courts have shown a willingness in recent cases[2] to respect and enforce detailed contractual terms governing investment advisors’ books of business and dealings with clients upon their departure from an investment firm, although they remain hostile to broader non- clauses.

 

Published November 22, 2007
 

 

[1] Link to the court’s full decision at: http://www.ontariocourts.on.ca/decisions/2005/
december/C41880.htm

[2]For additional discussion on this issue, see our firm’s November 2006 article “Departing employees and the ongoing battle over investment firm clients”

article keywords: securities, Securities Act, disclosure, class action, costs, business judgment rule, misrepresentation, s.130, statutory interpretation, legislation, Supreme Court of Canada, shareholders, shares, equities, investment, broker, initial public offering, prospectus, corporation, management decisions, reasonableness, deference, Binnie, Laskin, Lederman, material changes, material facts, forecasts, economic performance

Kenneth A. Dekker
Affleck Greene McMurtry LLP

Kenneth A. Dekker

Kenneth Dekker, a partner of the firm, is a successful trial and appellate lawyer who is valued by his clients as a resourceful and practical litigation counsel.

Over more than two decades, Ken has litigated noteworthy cases in a range of fields that include class action defence, securities and broker-dealer litigation and regulatory defence, corporate and shareholder disputes (including oppression and winding up cases), defamation, civil fraud litigation, disputes over contracts, injunctions, professional liability litigation, litigation and cross-border litigation issues.

Ken has appeared before all levels of courts in Ontario, including the Ontario Court of Justice, the Superior Court of Justice, the Divisional Court and the Court of Appeal for Ontario, as well as before the Supreme Court of Canada. Ken also represents and advises clients in regulatory matters before the Investment Industry Organization of Canada (IIROC), the Mutual Fund Dealers Association of Canada (MFDA) and the Ontario Securities Commission (OSC).

Ken has been recognized for Corporate and Commercial Litigation by Best Lawyers of Canada and has been given the highest available rating of AV, or pre-eminent, by his peers on Martindale-Hubbell.

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