Departing Investment Advisors: An Update Since The Supreme Court's Decision In RBC v. Merrill Lynch
The Departure of an Investment Advisor
The departure of an investment advisor (IA) raises a number of serious and often conflicting considerations. For the IA, a departure could mean uncertainty in terms of earning a livelihood and risks upsetting longstanding relationships with clients. For the brokerage, a departure might mean the loss of confidential information, employees, or clients. Intertwined with these considerations are the obligations owed by both IAs and brokerages to the clients during the period of transition.
How these concerns are addressed will depend on the nature of any duties or obligations that exist between IAs and their brokerages. In 2008, the Supreme Court of Canada (SCC) last considered the scope of these obligations in its decision in RBC Dominion Securities Inc. v. Merrill Lynch Canada Inc., 2008 SCC 54.
The RBC Dominion Securities Decision
In November 2000 a mass departure took place at the RBC Dominion Securities (RBCDS) branch in Cranbrook, British Columbia. Without providing advance notice, nearly all of the IAs left to join competitor Merrill Lynch, taking copies of client records with them. This move, coordinated by the branch manager, left only two junior IAs behind, effectively decimating the branch.
Protracted litigation erupted following the departure, ultimately winding its way to the SCC. None of the departing IAs were bound by any formal employment agreement specifically preventing them from competing with Merrill Lynch or soliciting former clients. As a result, the SCC attempted to clarify the existence and scope of an IA's common law employment obligations in and around the time of their departure. Specifically, the SCC concluded that:
The individual IAs breached an implied term of their employment agreement by failing to give reasonable notice of their departure. However, once the employment relationship had ended, the IAs did not owe a general duty not to compete with RBCDS, so long as they did not misuse confidential information obtained in the course of their employment. The branch manager breached his duty to act in good faith by systematically orchestrating the departure of the other IAs while employed with RBCDS. Accordingly, he was personally liable for RBCDS' lost profits arising from the mass departure. Outcome and Further Issues
The SCC's decision delineated several aspects of the relationship between IAs and their brokerages. In particular, the SCC confirmed that IAs have an implied duty to:
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