United Securities sticks former brokers with tail E&O bill

NEW YORK — Brokers who left United Securities Alliance Inc. before its March 1 acquisition by Royal Alliance Associates Inc. received a letter from United’s lawyers last month that contained a surprise: They owe United $5,000.
The charge covered their part of the premium for tail errors and omissions insurance, according to the letter received March 16 by two reps who had left Greenwood Village, Colo.-based United Securities.
“The fact of the matter is, the guys who stayed got treated differently from those who left,” said one of the departed advisers, who asked not to be identified.
“It’s pure punishment for the guys who left,” said the adviser, adding that United also has stopped paying commissions due those brokers.
Dominic A. Lloyd, a Denver-based partner with Baker & Hostetler LLP of Cleveland and attorney for United, acknowledged that the letters went only to the “under 200” reps who left the firm before the acquisition, not the 117 who joined Royal Alliance.
“Some brokers are saying they were surprised by having to pay the tail E&O charge, because it wasn’t specifically mentioned in their rep agreement,” he said. “But the general language of the agreement does cover expenses of this type.”
Mr. Lloyd added that some of the reps had sold unspecific “non-traditional” products, and United wanted to be covered, which is why it took out the insurance.
Mark Quinn, Royal Alliance’s general counsel, said that firms purchase tail E&O insurance typically after they go out of business.
“It’s necessary, because normal E&O no longer applies,” he said.
However, Mr. Quinn stressed that it is not up to Royal Alliance to determine who should pay for the insurance. “That’s up to the reps and the firm,” he said.
“It is critical for a representative who leaves a broker-dealer that has sold its assets and had its professional-liability coverage terminated to have tail insurance. Otherwise, they are without any protection for new claims arising from their activity in the pre-transfer period,” Steven J. Insel, an attorney with Jeffer Mangels Butler & Marmaro LLP of Los Angeles, wrote in an e-mail message.
Tail E&O insurance usually covers a 12-month period and can cost “150% to 200% of the annual premium of a standard E&O policy,” said Andrew J. Fotopulos, executive vice president of Boston-based Theodore Liftman Insurance Inc.
In meetings this winter about the sale of United to Royal, which first was announced internally in January, no executives mentioned tail E&O coverage, said one of the advisers who left before the acquisition.
Larry Papike, president of Cross-Search, a recruiting firm in Jamul, Calif., said that charging reps for tail E&O insurance was unheard of and wondered how it might affect Royal Alliance’s acquisition strategy, which focuses on small and midsize broker-dealers like United Securities Alliance (InvestmentNews, March 19).
The insurance question, he said, “makes it really difficult for a broker who decides not to go with Royal.”
Mr. Papike added that the withholding of brokers’ commissions after a firm’s change of ownership also poses a problem, because brokers and advisers “plan on those commissions,” especially at the expensive time of transition.
Had United Securities not been sold, many of the reps who left likely would have stayed, he noted.
Royal Alliance of New York, which had $408 million in gross revenue last year, is the largest broker-dealer in the AIG Advisor Group.
Although neither Royal Alliance nor United Securities disclosed the acquired firm’s gross revenue, industry observers estimate it at about $24 million.