A recent ruling on an adviser's lawsuit siding with a registered investment advisory firm and a software company exhibits how little control advisers may actually have over their customers' information.
Leland O. Stevens sued advisory firm Interactive Financial Advisors and Redtail Technology, the client relationship management software provider, after the firm ordered the technology vendor to immediately deny him access to his clients' information because it terminated its relationship with the adviser. Mr. Stevens was acting as an independent contractor for the company at the time.
The court's final decision, after Mr. Stevens appealed, was filed late last month, in favor of the defendants. He plans to appeal again, Mr. Stevens said.
"The court was totally wrong," Mr. Stevens said. "As far as data ownership, and relationship ownership, I owned 100 percent of it."
However, the lawsuit cited the Securities and Exchange Commission's Regulation S-P, a rule that requires protection of clients' personal information and prohibits sharing nonpublic client information to non-affiliated third-parties. As it turns out, there are no clear rules on who owns
client data.
"An investment advisor's duty under the regulation quashes any ownership claim; it was incumbent on IFA to not disclose its clients' information to non-affiliated third parties, even if the unaffiliated third party initially generated the clients," the court's decision states.
Mr. Stevens began working with IFA in 2003 based on an oral agreement, after 20 years of working as an insurance salesman. Because he was not a registered investment adviser, he was required to associate with one in order to sell investment advice. He and the firm did not create a written contract until June 2009. According to his lawsuit, Mr. Stevens was using Redtail before IFA struck an agreement with the technology company to offer its services to its advisers, then paying the vendor and deducting the cost from Mr. Stevens' share of client fees.
Mr. Stevens uploaded client information for IFA clients, as well as for those who were not IFA clients and purchased only insurance products. After the firm found out in October 2009 that he had allegedly been involved in a Ponzi scheme, it cut its relationship with him and ordered Redtail to deny him access to the database. The firm began transferring Mr. Stevens' clients to other advisory representatives. According to his lawsuit, Mr. Stevens claimed the firm stole his client data.
But because Interactive Financial Advisors eventually had the contract with Redtail, it was able to order the software company to deny Mr. Stevens access, an attorney for IFA and Redtail said.
"He had that information in Redtail, so from IFA's perspective, once he was no longer associated with IFA, they had to cut him off," said Howard Rosenburg, an attorney at Kopecky Schumacher Rosenburg PC who represented Interactive Financial Advisors and Redtail Technology.
According to court documents, Mr. Stevens said IFA's president told him his clients belonged to him, in which case he could transfer clients to a new firm or receive a payout. The defendants argued Mr. Stevens did not have that right upon termination.
Ownership tends to lean more toward the employers, though, said Bill Singer, an attorney who specializes in the financial services industry.
"What sort of developed is the employers in the industry have been given the right by the courts because it has been sustained in litigation after litigation to deem certain information they have as proprietary," Mr. Singer said. "That is often defined as customer information."
Data ownership is a gray area between advisers and firms, especially based on the adviser's role. Departing broker-dealers are allowed five pieces of information, including clients' names and contact information, based on Broker Protocol rules. For an adviser with an RIA, that information belongs with the firm, said William Boland, senior analyst within Aite Group's wealth management team.
"In the case of the RIA, there is a belief or an understanding that the adviser built the relationship and in many instances believe they owned the relationship," Mr. Boland said. Eventually, however, as was seen in Mr. Stevens' case, "it comes down to the security of client data."
