Investment Advisors

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Investment advisors are responsible for a book of business that often consists of hundreds of client households and hundreds of millions in assets. They develop a close personal connection with clients such that many, if not most, clients are apt to follow the advisors if they leave for another firm.

For their part, advisory firms will try to slow or reduce the transfer of assets to the new firm by putting in place non-solicitation clauses in employment agreements and carefully guarding client information.

Not surprisingly, disputes over whether the investment advisor engaged in unlawful activity in moving to a competitor lead to significant amounts of litigation. These cases provide a considerable amount of guidance to other investment advisors considering a move, as well as to their new firms.

Pulver Crawford Munroe LLP has provided advice to more than 50 investment advisors and their teams, as well as their new firms, on transfers and on threatened or actual litigation.

The sampling below of decisions from the courts describes many of the typical issues that arise in litigation and how the courts have dealt with them.

RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc., 2008 SCC 54 and 2007 BCCA 22

This lengthy battle between two heavyweight investment advisory firms wound its way through the courts, all the way to the Supreme Court of Canada. The decisions rendered by the Supreme Court and, before it, the BC Court of Appeal, provide important guidance to investment advisors and their firms when contemplating the transfer of a team of advisors.

In this case, the advisors who moved from RBCDS to Merrill Lynch had not entered into non-competition or non-solicitation agreements. Nonetheless, RBCDS sued them and Merrill Lynch, alleging, amongst other things, a failure to give reasonable notice of resignations, breach of confidence and, with respect to the head of the branch who organized the departure, breach of his duty of good faith.

The Supreme Court held that, generally (in the absence of a non-compete or non-solicit), an employee who has resigned is not prevented from competing with their employer during the period of notice of they should have provided. Rather, the former employer is confined to damages for failure to give reasonable notice and for other potential wrongs, such as breach of confidential information. There is no general duty not to compete after departure, however.

Ultimately, the court upheld an award of a nearly $1.5 million against the branch manager for breach of his duty of good faith in organizing the departure and punitive damages awards, including $250,000 against Merrill Lynch for its role in the taking of client records by the advisors.

The B.C. Court of Appeal decision that preceded the Supreme Court decision is notable for holding that “an advisor should be able, without fear of litigation, to prepare a list of his own book of business from the records of the brokerage house”, i.e. names and contact information, in order to advise the clients of their move to a new firm. Further, “a client is entitled to know immediately upon his advisor leaving one firm for another where that advisor has gone so that he or she can decide whether to change to the new firm or remain with the old.” 

The court held the right to maintain client contact information did not extend to other documents, however, such as the “Know Your Client” forms and the information contained therein.

R.T. Investment Counsel Inc. v. Werry, 1999 CanLII 5886 (BCSC)

The concept that an investment firm “owns” the clients and hence should have an absolute right to bar departed advisors from contacting them frequently has been rejected. In the R.T. Investment Counsel decision, the B.C. Supreme Court put it this way:

“There is a public interest factor to consider.  The plaintiff does not “own” the clients; those clients should be free to receive information from all competitive sources and to have the ability to decide if they wish to follow a person with whom they have developed an individual trust and confidence regarding investment advice.”

That is not to say advisors always are free to solicit the clients – sometimes there may be an enforceable non-solicitation clause at play (there was not in this case). But even if not allowed to solicit, i.e. try to persuade the clients to move with them,  advisors usually will be permitted to notify the clients of their new firm. 

Brian L. Leipert Financial Services Ltd. v Reiter, 2019 SKQB 310

Occasionally, though rarely, a departed advisor may be found to have been a “fiduciary”, owing particular duties of loyalty to their former employer that survive their departure. One of those duties may be not to solicit clients of the former employer for a reasonable period of time after departure.

In this case, after reviewing the two defendants’ positions with their former employer, including their senior management positions, scope for independent actions and relationships with the clients, the court found they were fiduciaries. It ordered them not to solicit clients for periods of three months in respect of investment/finance services clients and nine months for insurance and benefit clients, reasoning that these respective periods of time would provide the plaintiff a reasonable opportunity to secure their business with the clients. 

Edward Jones v. Voldeng, 2012 BCCA 294

Frequently, upon learning of an advisor’s departure, the first move by the advisory firm is to seek an interlocutory injunction to enforce a non-solicit clause before a trial. The application can be made immediately, on the basis of affidavit evidence and legal argument. The former firm essentially asks the court to enforce the non-solicit until it normally would expire or until a full trial can be held.

One of the tasks of the court at this stage is to determine whether, if the case ultimately gets to a full trial, an award of damages would be sufficient if the former firm successfully argues the non-solicit was enforceable and that the advisor breached it. The former firm will argue that permanent loss of market share or the difficult in assessing what damages flowed from illegal activity make the harm it will suffer “irreparable” and hence the court instead should grant the injunction right out of the gate.

In this case, the B.C. Court of Appeal overturned a lower court decision that had issued an injunction to enforce a six-month non-solicit clause. It held that the detailed records of client holdings and transfers maintained  by investment firms means that damages from breach of a non-solicit clauses can be calculated and awarded. In other words, the harm from a breach is not “irreparable”.

National Bank Financial Inc. v Canaccord Genuity Corp., 2018 BCSC 857

In this case, Dean Crawford, K.C. of our firm successfully argued that National Bank Financial’s request for an interlocutory injunction to prevent client solicitation should be denied.

NBF sought the injunction against a team of advisors who had left NBF for Canaccord Genuity. The court agreed with our firm’s arguments that the non-solicit clauses were ambiguous and that NBF had failed to lead evidence as to why the length of the prohibitions, 12 or 24 months depending on the advisor, were reasonable.

The court held, additionally, that the clauses were not enforceable because NBF failed to pay proper “consideration”, i.e. something of value to the advisors, for them. NBF attempted to rely on a non-solicit clause in its Code of Conduct, but the court rejected the argument, holding that “more was required to be done by the plaintiff if it wished to bind the individual defendants to the non-solicitation provision embedded in the bowels of its Code of Conduct.”

MD Management Ltd. v. Dhut, 2004 BCSC 513

In this decision, the BC Supreme Court prohibited solicitation of clients by a departed advisor for about a half-year from departure. The circumstances of the case were somewhat unique. The firm he departed had a narrow focus on financial investment for physicians and had provided the advisor with a book of business consisting of more than 500 existing clients.

The court held that the plaintiff had a legitimate proprietary interest – the client list it provided to the defendant – to protect. “The plaintiff, being a specialized company dealing with physicians, has a genuine interest in ensuring that it is not used simply as an opportunity for financial planners to make contact with physician investors within the relatively protected environment of the firm and then attempt to utilize those contacts to take customers away from it.” The court also held that other features of the clause were reasonable.

ATB Securities Inc. v. RBC Dominion Securities Inc., 2008 ABQB 392

In this decision, the court declined to issue an injunction before trial, which would have prevented the departed investment advisor from soliciting the clients he served while at ATB Securities.

Amongst other things, the court found there was a question as to whether the clause was too broad, as it applied to “prospective clients” who had not been actual clients of ATB. It also found the evidence did not show the advisor to be clearly soliciting clients in any event. 

The court further held there was no evidence that ATB would suffer irreparable harm that could not be compensated in damages at trial if an injunction was not issued. As of the date of the injunction application, there had been a transfer of $11 million in assets. The court found that this figure, when compared to the $3.36 billion managed by ATB, “is negligible in the grand scheme of things.”

Sun Life Financial Distributors (Canada) Inc. et al. v. Sanche et al., 2008 MBQB 99

In this decision, Sun Life sought an injunction before trial to prevent solicitation of clients by the departed advisor, who had moved to Raymond James. Sun Life relied on separate non-solicitation clauses relating to insurance products and mutual funds. It also alleged the advisor was a fiduciary who should be restrained from soliciting clients for a reasonable period of time.

While the court held there was insufficient proof of the advisor having been a fiduciary, it did find the non-solicit provisions to be reasonable on the evidence before it. However, the court declined to issue the injunction based, in part, on its determination that any alleged losses suffered by Sun Life could be compensated by damages at a full trial, i.e. its losses would not be “irreparable” if the court did not issue an injunction. The industry, the court noted, is one of the most highly-regulated in Canada with detailed record-keeping required. The records would facilitate a calculation of lost commissions arising from the transfer of clients.

Mandeville Holdings Inc. v. Santucci, 2021 ONSC 4321

When deciding whether to enforce a non-solicit or non-compete clause, the courts will distinguish between clauses that arise in an employment context as opposed to those that arise from a sale of business.

Those that arise in an employment context are construed much more strictly, based on a presumption of inequality of bargaining power between employer and employee.  By contrast, where the owner of a business sells it and agrees as part of the sale to be bound by a non-solicit or non-compete, the court presumes an equality of bargaining power. As such, the courts are more apt to enforce clauses negotiated as part of a sale of a business.

In this case, the unique structure of the agreement the investment advisor negotiated with his firm to move his book of business there led the court to consider the non-solicitation clause part of a sale of a business. In joining Mandeville Private Client Inc., Santucci negotiated a deal that included significant equity in Mandeville’s parent company, an interest free loan and, notably, payment to him of $390,000 for purchase of assets, which consisted mainly of the goodwill in the 240 clients in his book of business. The court found that these arrangements, particularly the purchase of the goodwill in the clients, was by no means Mandeville’s “standard method of doing business” and that “This was a negotiated arrangement.”

Applying the sale-of-a-business lens to the two year restricting on soliciting of clients, the court held the clause to be reasonable and enforceable.

Merit Group Insurance Brokers Inc. v. Sheppard, 2008 CanLII 46131 (ONSC)

Canadian case law states that when an employer dismisses an employee without cause, it has “repudiated” the employment agreement and accordingly any non-competition or non-solicitation clauses in that agreement are not enforceable. This is known as the General Billposting principle, after a decision from the English House of Lords that has been applied by Canadian courts.

Occasionally, departed investment advisors have raised the General Billposting principle and argued that their non-solicits are not enforceable as they were wrongfully or constructively dismissed. This was the case in the Merit Group decision, where an advisor who sold mutual funds was dismissed. His employer alleged cause for dismissal after discovering he had granted access to its computer systems to a competitor – his future employer – for the purpose of downloading client information and then began soliciting those clients to transfer their accounts, all before his planned departure.

After terminating the advisor for cause, Merit also commenced a claim against him for breach of his non-solicitation clause, amongst other things. The advisor argued that his non-solicit was not enforceable, as he had been constructively dismissed. He argued that his former firm had failed to provide adequate administrative support, failed to pay him in a timely way and failed to refer work.

The court rejected these arguments, finding the firm had just cause for dismissal, and awarded damages against the advisor.