Moving Beyond A Firm's Financial Strife

(Dow Jones) Moving on from a financially troubled brokerage can be a relief compared to ongoing worries about a firm's cash flow crisis.

Many of the 100 advisors at Jesup & Lamont Securities Corp., a unit of Jesup & Lamont Inc., have likely started that process. The company said Monday it was notified by regulators Friday that it was out of compliance with an industry net capital rule and that its securities business would now be limited to liquidations.

That effectively leaves the company's advisors without the ability to earn a living, or carry out investment strategies that require purchasing securities, unless the situation is resolved. Jesup & Lamont has about 100 other employees providing back office, investment banking and management services.

Joining another firm is typically a wise move for advisors facing such an extreme situation, say lawyers. "It's not in the best interest of either customers or brokers to linger very long because neither can do much," says former regulator Alan Wolper.

"If you want to sell and reposition assets, you have very little flexibility," says Wolper, a former director of the Financial Industry Regulatory Authority's Atlanta office who now practices securities law in Chicago.

Jesup & Lamont says it is taking steps to remedy the capital deficiency and regain permission from Finra to restart transactions. Brokers who wait out the process will, however, risk losing worried clients and their income.

Jesup & Lamont clears its transactions through third-party firms that hold clients' funds, according to regulatory filings. That will make transitioning to new firms easier for brokers, says Marc Dobin, a lawyer in Jupiter, Fla., who represents brokers.

Customers can direct the transfer of their assets to a broker's new firm simply by filling out a form that authorizes the process through the Automated Customer Account Transfer Service, a system that transfers securities to and from customer accounts at different brokerages.

Some assets, however, such as variable annuities and proprietary mutual funds don't transfer through the system unless the receiving firm has a selling agreement with the issuer. That could mean losing some trailing commissions--funds an adviser is paid for each year a client holds certain investments.

"The last place you want to be is having a customer who wants to follow you but only a third of their assets will come over," says Thomas Potter III, a lawyer in Nashville who specializes in broker dealer regulation.

Advisors should avoid violating privacy regulations during the transition process, says Potter. An advisor's old firm has privacy obligations to clients until they move their assets to another firm, he says. Copying client information, such as account and Social Security numbers, to a flash drive or other storage device before a client authorizes a transfer could mean future trouble with regulators, he says.

Filling in account transfer forms for clients to sign after registering with a new firm is also against the rules, says Potter. "If you think it would be a nice convenience for your customers to fill in the form with their account numbers, you can't," he says.

Employment or independent contractor agreements with a current firm can be another hurdle for advisors. They must often give notice, but those provisions may not apply if a firm is having financial problems. "There are usually 'outs' when firms have financial difficulties because brokers can't serve their customers," he says.

A chance to bond with clients is often a silver lining amid the paperwork and anxiety of a firm's possible closing, says Potter. "There's a lot of client hand holding you can do," he says. "It's a great time for that."