The core to any business is its clients. In the investment industry, client lists are a hot commodity and most firms treat them as proprietary information, as trade secrets. Last week Morgan Stanley was found guilty of poaching a customer list when it hired a broker away from Schwab. The breach will cost $1.2 million dollars.
Defining trade secrets
The California Uniform Trade Secrets Act is the crux of the ruling. According to the law, to be a trade secret, information must:
- Have value to the company
- The company must take measure to keep it secret
If the information at hand, such as a list of investors, meets the criteria above then it’s likely to be protected by the law. This includes seemingly “everyday” information like a client list, and is not limited to internal software, finances or other high-level data.
Company policy and protection
While company information is always vulnerable to a rogue employee, there are measures a business can take to protect information and to make sure employees understand its importance to your success. The best way to do this is by updating employee contracts to stress confidentiality and to define intellectual property. Repetition emphasizes that it’s a core business practice. Policies on data sharing, storage devices and highlighting the consequences of disclosing intellectual property will remind employees of its sensitive nature.
Morgan Stanley is already stressing this in the aftermath of the last week’s decision. Investment News reports that a company-wide email informed employees of new non-solicitation and confidentiality obligations for its financial advisers.
An industry rift
Intellectual property holds great value to a business, which is why the Morgan Stanley penalty is so expensive. In this case, it’s part of a larger industry discussion about ownership of client lists, as registered investment advisers who change positions between large and independent firms use different methods. The case already has fallout, as Morgan Stanley pulled out of the 2004 broker protocol after the ruling, proving that trade secrets are valuable to both your business and to the larger business environment around your company.