Got Protocol?

U.S. Trust recently told its advisors they had to repudiate the broker protocol for recruiting in writing. Will other firms follow? Here’s a refresher so you know what the protocol does and does not protect when you seek a new home for your clients and your practice.


The “Protocol for Broker Recruiting” has received much attention following Bank of America’s recent announcement that advisors in its U.S. Trust Division must put in writing that they are not subject to the Protocol. The Bank also required its U.S. Trust Advisors to agree to a policy requiring 60 days notice before an advisor departs, followed by a six month non-solicit of clients. The new policy has caused quite a stir among brokers and financial advisors because of the added restrictions it imposed (garden leave had only been two weeks), the manner it which was done (advisors are required to agree), and the possibility that it is a harbinger of change for financial advisors at other firms. Despite all the recent attention, the Broker Protocol remains widely misunderstood by brokers, investment advisors and others in the industry. So here’s a little refresher on the agreement, which now has over 500 signatories.

Pros and Cons

The stated goal of the Broker Protocol is to promote client privacy and freedom of choice when a registered rep. (RR) moves between two firms that have signed on to the Protocol. It does that by permitting a departing RR to take certain limited client information (client names, addresses, phone numbers, e-mail addresses and account titles) with him, provided he carefully follows the various procedures set forth in the agreement. RRs are forbidden from taking any other documents or information (and are well advised to follow that proscription in any event). If the various procedures set forth in the Protocol are followed prior to departure, the RR is permitted to solicit the clients he served at the old firm—after he joins his new firm. At least in theory, that solicitation can be done by the RR without fear of suit alleging breach of his non-solicit and non-compete agreements.

But simply following the Broker Protocol is not a panacea that assures a smooth transition. Switching firms is still a process that often leads to litigation filed by the firm that lost the RR, involving applications for temporary injunctive relief that are sometimes granted and which are disruptive in any event, and claims for monetary damages. Although the disputes are usually settled, the associated uncertainty and legal expense complicates the transition for the RR and the new firm.

What an RR considering switching firms or establishing his own firm needs to understand first is that the Broker Protocol, by its express terms, provides a safe harbor only after an RR leaves one firm that is signatory and joins a new firm, which also is a signatory. Even assuming two signatory firms are involved, RR’s remain subject to substantial contractual and common law restrictions while employed by the firm they seek to leave. The contractual restrictions may be imposed in any one of a number of documents, many of which one might not initially suspect, including the RR’s original application for employment, account service agreements, all variety of individual or Team Financial Advisor Agreements, Account Assignment Agreements and or Promissory Notes.

Among the most important restrictions on the terms of the broker protocol that RRs should consider is the notice requirement, commonly referred to as the “garden leave” period. During garden leave, the departing RR remains an employee of his firm even though he has given notice of his resignation and he is not “actively working” (other than perhaps in his garden). The RR owes a common law, if not also an express contractual, duty of undivided loyalty during the garden leave period. Among other things, the duty of undivided loyalty precludes soliciting clients to switch firms before the period of garden leave employment ends. It also precludes taking any client information. These common law and contractual restrictions pose a substantial impediment to the RR’s ability to switch firms swiftly and smoothly, and they exist independently of the Broker Protocol.

Even after the garden leave period expires, RRs often remain subject to contractual duties not to solicit and/or compete, which can extend for many months post-employment. Remember that by its terms the Broker Protocol provides a safe haven for solicitation once employment at the new firm begins, but that safety is afforded only if the RR follows the Protocol’s procedures. Not surprisingly, more than one RR has been sued for wrongful solicitation after he joined his new firm based on allegations that he did not follow the Protocol to the letter.

Members Only

Although a large number of firms are signatories, many are not. Moreover, many signatories have recently begun to qualify their “agreements.” Each of these factors further diminishes the utility of the Protocol. Brokers and advisors who switch firms must be aware that, if they take client information with them, they may be liable if both companies did not sign the protocol.

Recent cases illustrate some of the parameters:


· Where the old firm is a signatory, but the new firm is not, the cases go both ways. For example, in Wachovia Sec., L.L.C. v. Stanton, a 2008 case from the Federal District Court of Iowa, the court held that where there is no reciprocal benefit, the prohibition on solicitation of clients is reasonably necessary to prevent client poaching. However, other courts have come to the opposite conclusion. In 2007, in Merrill Lynch v. Brennan, the Federal District Court in Ohio held that, because Merrill Lynch was a signatory to the protocol, it had tacitly accepted that the taking of client lists by departing brokers did not cause irreparable harm required for the court to grant an injunction. Similarly, in Smith Barney v. Griffin, a 2008 case from Massachusetts state court, the court held that a signatory firm could not claim irreparable harm when brokers left for non-signatory firms and then solicited clients to move to the new firm because the signatory firm (Smith Barney in this case) accepted the same conduct if the registered representative moved to other signatory firms. And in Merrill Lynch v. Baxter, from the Utah Federal District Court in 2009, the court reasoned that Merrill Lynch could not claim it would suffer irreparable harm because it was in the same position it would have been in had the defendant gone to a signatory firm.

· Cases like Brennan, Griffin and Baxter have led some to wonder if the protocol has become the de facto industry standard. At least one court, however, has explicitly rejected that view. In Hilliard v. Clark, a 2007 case from Michigan Federal District Court, the court forthrightly held that, “By its own terms, the Protocol applies only to those firms who sign it.” In 2010, a Connecticut Federal District Court, in Genworth Financial Wealth Management, Inc. v. McMullan et al., also rejected the view that the protocol has become the de facto industry standard. The court held that the plaintiff, which was not a signatory to the protocol, should be granted a preliminary injunction against the defendant employees. The court found that the defendants, who had copied information from the plaintiff’s client database, “lacked a reasonable basis to conclude that their actions were authorized under the Protocol, since Genworth was not a Protocol signatory.”

Even where both firms are signatories to the Protocol, firms losing valuable brokers to other signatory firms continue to allege at times that the departing RRs jumped the gun on the protocol and did not adhere to their contractual and common law obligations. For instance, in Morgan Stanley Smith Barney v. Ayer et al., a case from last year in New York State Court in Manhattan, the RRs and their new firm argued that their actions were protected by the protocol. But the plaintiff alleged that the employees had solicited customers before resigning and prepared packages of customer performance reports for use at their new firm, none of which is protected by the protocol. The court enjoined the employees from using any confidential information pending an arbitration hearing at the Financial Industry Regulatory Authority (FINRA).

The Takeaway

Despite the large number of firms who are party to it, the broker protocol has certainly not stopped litigation with departing RRs. Depending on the circumstances, firms may still attempt to prevent employees from using client information when they move to a new firm. The bottom line is that the protocol provides only limited protection. It may not apply because one of the firms involved is not a signatory, or is a signatory but with qualifications that amount to a claimed exemption. Even when it does apply, its terms provide a certain safety net, but only after the RR has started at the new firm. Moreover, if the firm losing the RR wants to make a statement or otherwise believes that the protocol was not adhered to, litigation will still ensue. In sum, the protocol is not a panacea that ensures a smooth transition. When an RR is thinking about switching firms, he is well served to retain experienced counsel to advise him on his contractual and common law obligations and the proper way to exit.

Robert Kraus is managing partner at Kraus & Zuchlewski LLP, which represents individuals in the financial services industry in employment law matters. Jeremy Freedman is an associate at the firm.

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