Protocol For Broker Recruiting Trumped In Interesting Arbitration Award

Posted on December 27th, 2013 at 10:16 AM

We monitor court decisions and arbitration awards that relate to a financial adviser’s transition from one financial services firm to another financial services firm. Often those employment moves come within the protections afforded by the Protocol for Broker Recruiting (the “Protocol”).  Sometimes, they do not.  One recent arbitration award, in a dispute between Fidelity Brokerage Services (“Fidelity”) and Morgan Stanley Smith Barney (“MSSB”) in Massachusetts, contains helpful guidance regarding some of the deciding factors.  Let’s review two major points of that guidance.

            As background, the Protocol was 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 be able to take advantage of the benefits of the Protocol (client solicitation and use of otherwise arguably confidential client information). 

            Fast forward to today, some courts and arbitrators have agreed with those contentions, but many others have not agreed.  As a result, brokers who are planning an employment transition strongly are advised to retain competent securities counsel to provide guidance and to plan strategy – whether or not there will be a “Protocol move.”  The Fidelity / MSSB case involves a dispute between a Protocol non-signatory (Fidelity) and a Protocol signatory (MSSB).  Fidelity prevails in a case that could have been decided simply by not extending Protocol protections to a non-signatory firm.  Instead, the arbitrators wrote an extensive, reasoned award.  In doing so, the award outlined two major points of guidance.

            The first point is the distinction drawn between the two business models of the firms in discussing whether the customer contact information was, in fact, a legally protected trade secret.  The test for whether a party is liable for misappropriating a trade secret is a difficult one to meet: 1) the information must indeed be a trade secret; 2) reasonable steps must have been taken to protect the information; and 3) the defendant had to have used improper means to misuse the information.  Among the reasons discussed in the arbitration award, the most notable was the observation: “The substantial difference in treatment accorded by the law to Fidelity and MSSB’s respective customer lists is a seminal distinction that reflects the very different business models employed by the two companies within the securities industry.”  The award discussed the differences: 1) Fidelity spends a significant sum of money on direct client acquisition; and 2) Fidelity provides its brokers with a book of business to service, thus “freed from the drudgery of cold calling and prospecting.”  By comparison, the award observed that MSSB requires the individual broker to build his or her book of business “largely” through the individual broker’s time and effort.

            The second point relates to advice that an attorney provided the broker departing Fidelity in connection with his announcements to clients that he had left the employ of Fidelity and was joining MSSB.  The arbitration award notes that it is permissible for advisers to announce their departure.  However, that announcement typically is communicated in writing so as to memorialize the communication and to ensure that the content of the announcement does not transcend into being what later may be deemed to be an improper solicitation of business.

            Departing from that traditional advice, the award describes how the attorney fashioned a new, more aggressive strategy.  Instead of a written announcement, the attorney recommended an announcement “exclusively by telephone”, and the Fidelity adviser followed that advice.  The award concludes that the strategy “was fraught with risk” -- risk that “could have been significantly diminished, if not entirely eliminated, by sending out written announcements.”  The arbitrators likewise rejected the contentions that a written announcement would have been too “impersonal” or would have been confused as junk mail.  Finally, there was evidence that the communication announcing the move, and some communications thereafter, went beyond simply announcing the move and thus constituted impermissible solicitation.

            The award discussed other interesting points at length but beyond the scope of this article.  Nonetheless, advisers, and their securities attorneys, should be wary of the possible consequences of bad advice.  The arbitrators permanently enjoined the broker from soliciting clients and using confidential client information.  In addition, the arbitrators awarded compensatory damages, punitive damages, and significant attorney’s fees and costs!

Related Attorneys: James J. Eccleston


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We just wanted to say thanks for your work in helping us get back some of the money we lost. We are not by any means rich, but we have saved some money and we have done so through a tight-fisted approach to most everything we do. So losing a significant chunk of money hurt…especially at a time when everyone else was growing their accounts. We really appreciate the work you did.

Allan and Adele


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