A small but intense burst of confusion was created last Friday by a report that Edward Jones had placed new and unprecedented levels of restriction on brokers who want to leave the firm. It turns out that those restrictions, while harsh, are probably not new, but some of the firm's advisers may just be waking up to them.
On Friday, WealthManagement.com, formerly Registered Rep, said that Edward Jones was circulating a new employment contract with its 11,700 brokers in the U.S. and that the management of the firm will sue a broker if he or she leaves and contacts a client to tag along. In turn, InvestmentNews' blogger Josh Brown highlighted the report in his daily collection of industry news.
There is, however, far more here than meets the eye. That, of course, is to be expected in the securities industry, where reality and language, particularly the language of contracts and lawsuits, often seem to be in perpetual conflict.
Edward Jones has always had a reputation in the retail-securities industry for being among the most protective of controlling the clients, and it is one of the last, if not the last, to not sign the broker recruitment protocol. That agreement allows brokers to move from one firm to another with limited private client information, such as a name and address, without fear of being sued. The Edward Jones way of doing business appears out of step with the broader industry trend of open-architecture advice that independent broker-dealers and RIA roll-ups are espousing.
It appears that so far, only Edward Jones brokers in California were told to sign a new contract received this month. Changes in state law there require new contracts for employees who have commission agreements with their employer. One Edward Jones broker, who asked not to be identified for fear of being fired, told InvestmentNews that he noticed nothing new in the contract.
For its part, Edward Jones also said there's nothing new in the contract. A company spokeswoman, Regina DeLuca-Imral, told InvestmentNews that the employment contract has been the same since 2004.
“The language [of the contract] is similar to other contracts in the industry,” Ms. DeLuca-Imral wrote in an e-mail. “While the language may not be exactly the same, the restrictions on solicitation are very similar throughout the industry. I don't have other contracts in front of me, but I'm sure you could find them.”
The fact that the contract dates back eight years, however, means that brokers who signed an agreement with Edward Jones prior to that may have had a shock when re-signing their work agreement. Ms. DeLuca-Imral did not comment about that possibility.
The managing partner, Jim Weddle, extolled the firm's strength, saying Edward Jones is on pace for record revenue and profits in 2012. Broker head count may be down slightly due to culling low producers, Mr. Weddle noted, but recruiting overall this year is strong, with an emphasis on hiring from the military paying off.
“So far in 2012, we have hired over 300 men and women from the military,” Mr. Weddle wrote in an e-mail.
There's no doubt the Edward Jones contract in question restricts its brokers. The question is whether it's more restrictive than others, and whether those restrictions hold up in securities arbitration or in court.
In a copy of the contract sent to InvestmentNews, the partnership tells brokers it's their fault if a client contacts them once brokers leave, regardless of who is making the call.
“Your agreement not to solicit [clients] means that you shall not, during your employment with Edward Jones, and for a period of one year thereafter, contact or communicate with any Edward Jones client for whom you provided services, regardless of who initiates said contact or communication, for the purpose of inviting, encouraging or requesting any Edward Jones clients to transfer” from the firm to the broker's new firm. according to the contract.
That one word, “regardless,” caught the eye and ear of securities attorneys contacted by InvestmentNews.
Edward Jones “is trying to enhance the contract's language to address past successful arguments against the enforcement of non-solicitation agreements in temporary restraining orders versus brokers who have left” the partnership, said Joseph Dougherty, a managing shareholder with Buchanan Ingersoll & Rooney PC.
The language Edward Jones uses is “logically inconsistent,” added Richard Roth, a securities attorney. Solicit means “to ask,” which stands counter to the meaning of “regardless of who initiates” contact, he said.
“This is broadening the definition beyond solicitation,” Mr. Roth said. “I'm actually surprised this would be in the agreement.”