“The practice is quite prevalent. The action by FINRA is not all that prevalent. In fact, FINRA has not really taken much action with Reg S-P,” says Brian Hamburger, an attorney and CEO of MarketCounsel, a business and compliance consulting firm. “They seem to be treating Reg S-P as a traffic incident as opposed to something that they’re really genuinely concerned about.”
As a result, many firms have come to see Reg S-P as a competitive weapon, according to Hamburger. He says it’s not uncommon for a brokerage that is losing advisors to a rival firm “to have tipped their hand” to FINRA in an effort to raise suspicions about how client information was handled. “Effectively, these firms have been using Reg S-P as the new restrictive covenant,” he says. That rule is viewed as “one of the few remaining tools to retain customer information,” he adds.
Hamburger faults regulators for failing to flesh out the details of the privacy regulation to stipulate what information breakaway brokers are permitted to take with them when they change firms. The SEC, the original author of Reg S-P, proposed amendments to that rule in 2008, but it has not enacted them. Included in that proposal was a provision that that would permit the transfer of some third party information – i.e., client data – from one firm to another.