In early 2009 and again in late 2010, I examined the Protocol for Broker Recruiting (the “Protocol”) and court opinions applying it to situations in which financial advisers had transitioned their employment from one financial services firm to another. The Protocol initially was conceived as a “safe passage” set of procedures which allowed signatories to the Protocol 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 signatory firm.
Straightforward enough. However, in early 2009 I also identified an “unintended consequence.” That is, we began to see non-Protocol signatories, faced with litigation, arguing that the Protocol effectively had become an industry standard for transitioning financial advisers. Those
non-signatories to the Protocol therefore contended that they should not be subject to TROs, other injunctive relief and damages even though they themselves might have signed employment agreements or other contractual agreements that expressly had contemplated such relief. I concluded in early 2009 that such a 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.” Likewise, a Massachusetts state court held the same way in a case involving Smith Barney.
By late 2010, I reached the conclusion that a “sea change” was taking place. I wrote, “It 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.” By then, a federal court in Utah had denied injunctive relief for Merrill Lynch, stating, “If 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.” Similarly, a Wisconsin federal court had relied upon the Protocol, court opinions and Wisconsin law to deny an injunction request related to the taking of client names, addresses, telephone numbers and email addresses.
As background, the principal goal of the Protocol is client choice. The Protocol 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
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 to extend 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.
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.
Nonetheless, 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.”
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. The SEC disagreed that the Protocol justified
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