Broker Protocol

In an effort to curb the litigation that occurs when financial advisors move from one broker-dealer to another, in 2004 three of the largest brokerage firms, Merrill Lynch, Citigroup, and UBS Financial Services formed the Protocol for Broker Recruiting also known as Broker Protocol.

The Broker Protocol is an agreement among a group of securities industry competitors to refrain from enforcing non-competes against brokers who move between signatory firms.  Since its implementation, many small and medium sized broker-dealers have embraced the Protocol, smoothing brokers’ transition from firm to firm.

In fact, membership in the Protocol includes almost 550 firms, including the majority of the largest wire houses.  Most surprising though is the trend of smaller broker-dealers joining the Protocol to obtain the secondary benefit that the Protocol provides – protection and predictability when hiring financial advisors.

The Protocol is an agreement that essentially eliminates costly litigation by and between its participants.  If a financial advisor leaves a member firm to join another member firm and follows the provisions set forth in the Protocol, there should not be any litigation against the broker or hiring firm.  The provisions of the Protocol establish a procedure for transitioning between firms that, when followed, saves the recruit and his new firm from legal fees, an injunction, a possible damages award, and the uncertainty inherent in litigation.

Under the Protocol, prior to resigning, the financial advisor should prepare two lists: the first containing his or her customers’ names, addresses, telephone numbers, email addresses and account types; the second containing all the information in the first, plus client account numbers.

The financial advisor must resign in writing to someone in management.  When the financial advisor resigns, the advisor should provide the customer list containing the account numbers to someone in management with their resignation letter.  Again, the list provided to management should include account numbers even though the list being taken does not.  The financial advisor can then take the other list to their new firm and use it to solicit customers to transfer their accounts.  The Protocol provides that only the financial advisor is permitted to use the list taken from the old firm.

If a firm participates in the Protocol and counsels its recruits (who must also be coming from a Protocol firm) to follow these procedures, neither the firm nor its recruit will have to contend with any lawsuits or liability for claims such as breach of a non-solicitation agreement or misappropriation of trade secrets.  In addition to limiting the likelihood of litigation, the Protocol is intended to eliminate an injunction prohibiting the recruit from contacting his or her clients, as well as any claim for damages associated with the old firms loss of business when clients.

Potential Litigaton despite the Broker Protocol

As such, the primary benefit of the Protocol is that is saves firms the expense of litigation, it eliminates the uncertainty for a financial advisor regarding whether the recruit will be subject to an injunction and it allows the recruit to solicit their customers to transfer their accounts to his/her new firm.

Although the Protocol does eliminate certain litigation claims associated with broker movement, it does not eliminate all potential litigation.  Litigation associated with one broker moving to a new firm includes: pre-resignation solicitation, claims for amounts due under promissory notes, claims for training costs, claims for violations of the Protocol, and raiding claims arising from group hires.

The onus is now on the hiring manager to make sure the financial advisor being recruited understands the Protocol and follows it to the letter.

If you are a financial advisor involved in litigation as a result of your alleged failure to follow the Protocol, the securities attorneys of The White Law Group may be able to help.

The White Law Group, LLC is a national securities arbitration and securities regulation/compliance law firm with offices in Chicago, Illinois and Boca Raton, Florida.

For more information on The White Law Group, please visit our website at http://whitesecuritieslaw.com.