I am the compliance officer for a midsize broker-dealer. One of our supervisors is dually registered with an RIA firm. We are aware of the dual registration and have approved it. However, the individual is also responsible for supervising the activities of the investment advisor representatives of the RIA [who are not registered reps with our brokerage firm]. Since this individual is also a supervisor for us, to what extent might we be held liable if one of the IARs at the RIA does something wrong?

Generally, your brokerage firm should not be held responsible if this supervisor, who also supervises IARs at an unaffiliated RIA, is negligent in his supervision of those IARs. The two key points are that your brokerage firm and the RIA are truly unaffiliated and the IARs are not dually registered with your firm. In such a situation, the advisory activities the IARs are engaged in are separate from the brokerage services provided by your firm. Therefore, the supervisory responsibilities of your employee are likewise separate and distinct and any failure to supervise the IARs on his part should not spill over.

Nevertheless, in our litigious society, don’t be surprised if your brokerage firm is still named in a lawsuit or arbitration that arises as a result of the IARs activities. Consequently, if you don’t have one already, you may want to have an indemnification agreement drawn up between the RIA and your firm. And it may also be a good idea to check out the RIA’s ADV brochure to make sure you are comfortable that its disclosures adequately describe the relationship between the firms.

I own a small broker-dealer. I’m planning to hire a rep from a major wirehouse. When I asked him for a copy of his employment contract so that I could have my lawyer review it for non-compete issues, the rep told me he didn’t have one. I was somewhat surprised, especially considering that the firm had given him some upfront money when he started. Is it possible that a major wirehouse wouldn’t have employment contracts for its reps?

Although it may be possible your prospective new hire does not have an employment contract, I would be surprised if he didn’t, especially coming from a large wirehouse and particularly when, as you noted, he received some upfront money. In my experience, most of the large Wall Street firms require their employees to sign contacts, even if they are only independent-contractor agreements. In almost every case, these contracts contain non-compete and non-solicitation clauses as well as confidentiality clauses.

Consequently, before you hire this individual, you need to make certain whether he is subject to any such prohibitions. If he is and you unknowingly assist him in breaching his agreement, you’ll find yourself on the receiving end of a lawsuit right along with him.

Your prospective employee should contact the human resources department of the brokerage firm and ask for copies of any agreements he signed, including the promissory note he probably executed when he received the upfront money. Keep in mind that some of the large firms are signatories to the Broker Protocol. So even if he has an employment contract, he may still be able to take some information and contact his clients.

To obtain more information about the Broker Protocol and to see if his firm is a signatory, visit www.sifma.org/services/standard-forms-and-documentation/broker-protocol.

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