Broker Protocol Again Revisited; Still An “Industry Standard” for Employment Transitions?

Posted on May 10th, 2013 at 10:14 AM

In early 2009 and again in late 2010, I examined the Protocol for Broker Recruiting (the “Protocol”), and court opinions that applied it to situations in which financial advisers had transitioned their employment from one financial services firm to another.[1]  The Protocol was initially conceived as a “safe passage” set of procedures which allowed Protocol signatories to avoid litigation (TROs, other injunctive relief and damages) associated with the solicitation of clients and the taking of client information from one signatory firm to another. 


The general idea was straightforward enough.  However, in early 2009 it became apparent that there were “unintended consequences.”  That is, non-Protocol signatories, faced with litigation, began to argue that the Protocol effectively had become an industry standard for transitioning financial advisers.  Non-signatories to the Protocol, therefore, contended that they should not be subject to TROs, other injunctive relief and damages, even though they might have signed employment agreements or other contractual agreements expressly contemplating such relief.  I concluded in early 2009, that creative argument had experienced considerable (though certainly not universal) success in the courts. For example, a federal court in Ohio handed Merrill Lynch a defeat in its effort to rein in brokers departing to a non-signatory firm, stating that, by “setting up such a procedure for departing brokers to take client lists, Merrill tacitly accepts that such an occurrence does not cause irreparable harm.”[2]  Likewise, a Massachusetts state court held the same way in a case involving Smith Barney.[3]


By late 2010, I reached the conclusion that a “sea change” was taking place.  I wrote, “[i]t now appears that the unintended consequence of allowing non-signatories to the Protocol to take advantage of the existence of the Protocol to argue an industry standard and thereby defeat litigation seeking injunctive relief has taken a firm hold.”[4]  By then, a federal court in Utah had denied injunctive relief for Merrill Lynch, stating, “[i]f customer confidence is not undermined when a departing broker leaves for another Protocol firm, it is difficult to comprehend why customer confidence constitutes irreparable harm when a departing broker goes to a non-Protocol firm.”[5]  Similarly, a Wisconsin federal court relied upon the Protocol, other court opinionsand Wisconsin law to deny an injunction request related to the taking of client names, addresses, telephone numbers and email addresses.[6]


The principal goal of the Protocol is client choice.  In that regard, the Protocol expressly provides:


The principal goal of the following Protocol is to further the clients’ interests of privacy and freedom of choice in connection with the movement of their [financial advisers] between firms.  If transitioning [financial advisers] and their firm follow this Protocol, neither the transitioning [financial adviser] nor the firm that he or she joins would have any monetary or other liability to the firm that the [financial adviser] left by reason of the [financial adviser’s] taking the information identified below or the solicitation of the client services by the [financial adviser] at his or her prior firm.


            To take advantage of the Protocol protection, though, transitioning financial advisers may take only the following client account information: client name, address, phone number, email address, and account title of the clients that they serviced while at the firm (the “Client Information”).  They are prohibited from taking any other client documents or information (such as client account numbers, account statements or tax identification numbers).  Similarly, financial advisers may not share with their new firm any Client Information prior to resignation (except personal sales production information). Further, the Protocol requires that resignations be in writing, be delivered to local branch management, and include a copy of the Client Information that the financial adviser is taking with him or her.  The Client Information list delivered to the branch additionally must include the account numbers for the clients serviced by the financial adviser.  It is worth noting that nothing in the Protocol alters the common law duty of loyalty as it relates to prohibiting a financial adviser from soliciting clients (to move their accounts) and staff (to join the new firm) before the adviser resigns.


            So, has the sea change, with respect to the increasingly broad application of the Protocol, continued, or is it reversing?  Overall, court opinions do not provide clear guidance.  Nonetheless, it is clear that some courts continue to refuse Protocol protections to non-signatories.  Consider a 2011 Connecticut state court case in which the court ruled that the Protocol rules were inapplicable to the parties’ dispute because neither the plaintiff nor the defendant was a signatory to the Protocol.[7]


            Additionally, in 2012 a FINRA panel of arbitrators rendered a reasoned award in a dispute involving Fidelity and Morgan Stanley.  In that case, respondents argued that the Protocol had become an “industry standard” and a “best practice” in the securities industry.  The arbitrators rejected that argument, finding, “Based on rudimentary principles of contract law, it is axiomatic that Fidelity, as a non-signatory, cannot be bound by nor have the terms of the Protocol imposed upon it by a signatory firm.”[8]


            Finally, one must be mindful of the fact that federal privacy regulations (known as Regulation S-P) also can impact the strategy surrounding and the outcome of an employment transition.  For example, in a Securities and Exchange Commission enforcement proceeding against NEXT Financial Group, the SEC issued an order against NEXT for allowing its financial advisers to disseminate customer nonpublic personal information (albeit for thousands of customers) without notice or ability to opt-out.[9]  The SEC disagreed that the Protocol justified that behavior.


            In conclusion, it is uncertain whether the sea change has continued or is reversing.  The protections of the Protocol may or may not apply to non-signatories, depending upon the facts of the case and the court jurisdiction.  Accordingly, lawyers and their clients are urged to research the law in their particular jurisdiction before relying upon any Protocol protections that may – or may not – exist.

[1]               See James J. Eccleston, Broker Protocol Revisited; An “Industry Standard” for Employment Transitions (2010).      

[2]               Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Brennan, 2007 WL 632904, at *2 (N.D. Ohio Feb. 23, 2007).

[3]               Smith Barney Div. of Citigroup Global Markets Inc. v. Griffin, 2008 WL 325269, at *5 (Mass. Super. Jan. 23, 2008).

[4]               Eccleston, Broker Protocol Revisited

[5]               Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Baxter, 2009 WL 960773, at *6  (D. Utah Apr. 8, 2009).

[6]               Smith Barney, Inc. v. Darling, 2009 WL 1544756 (E.D.Wis. June 3, 2009).

[7]               Webster Bank v. Ludwin, 2011 WL 522050 (Sup.Ct.Conn.)

[8]               Fidelity v. Morgan Stanley, 2012 WL 4481995 (FINRA)

[9]               Next Financial Group, Inc., 2008 WL 2444775 (S.E.C.)


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