The Protocol for Broker Recruiting

Every year, hundreds of Registered Representatives leave their firms to create new firms or move to other companies. Until 2004, these transitions were often accompanied by lawsuits in which the former employers sought to enforce contractual non-solicitation and non-compete provisions limiting contact with the customers that were served by the departing individual. These suits could be costly and sometimes resulted in injunctions that prevented the brokers from contacting their customers on behalf of their new employer. The Protocol for Broker Recruiting virtually ended this litigation among firms that chose to enter into the agreement.

Our intent is to become a repository of all things Protocol. We will be posting cases of interest and other information regarding the Protocol specifically and recruiting in the financial services industry in general. Carlile Patchen & Murphy LLP has advised brokers, advisors and their firms on joining the Protocol, and using its provisions to transition advisors to new firms while avoiding costly litigation and down time. For more information please call Dennis Concilla or Doug Jennings at 614-228-6135.

Dec16

Terminated Representatives – How does the Protocol apply to them?

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It’s Friday afternoon and your manager unexpectedly calls you into his office. When you get there, you’re surprised to find an HR representative is already there. Thus, begins any employee’s worst nightmare. You are being terminated and will be asked to leave the building immediately. Oh, and you will need to pay back that promissory note as well. For a representative subject to an employment agreement containing non-solicitation and confidentiality provisions, does the Protocol provide any protection in this situation?

The Protocol was drafted for the typical case in which a registered representative resigns from one firm to join another. It refers to movement from one firm to another and indicates that “resignations will be in writing.” When these cases go to FINRA arbitration, employers will sometimes claim that the Protocol does not apply because representatives may only take confidential information if they move to another Protocol member firm. However, a terminated employee usually does not have a new firm lined up yet.

From the perspective of the terminated employee, the most important issue is whether the representative can retain a client list and solicit those customers once he gets back on his feet. If the representative was moving to another Protocol member firm, a copy of the list would have been prepared in advance by the representative. If the terminated employee does not have such a list available, it may still be possible to develop a list from memory and public sources such as telephone directories.

If a list can be prepared, a terminated employee should consider sending a copy of the list to the former employer with a letter indicating that the representative plans to use this information for solicitation only in the event he or she becomes employed by a Protocol member firm. If the employer is unwilling to permit the representative to retain the information under these conditions, the employer might agree to provide the list in the event the representative becomes registered with a Protocol member firm. As in the case of a Protocol resignation, the employee should not retain any client information beyond that permitted under the Protocol. And no solicitation activities can take place until new employment is secured with a Protocol member firm.

Terminations of experienced representatives are fraught with danger for both the firm and the representative. On the one hand, the representative’s livelihood is put at risk. But the firm must also walk a fine line. While far from common, multi-million dollar awards have been rendered against firms for wrongful termination or defamation. A registered representative in this situation would be well advised to seek experienced legal counsel as soon as possible.

Dec07

Social Networking - Was that tweet a solicitation?

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In just a few short years, social media sites such as LinkedIn, Facebook and Twitter have become an accepted and some would say essential tool of business communication. Employers seeking to preserve the confidentiality of their customer lists have struggled to keep pace in this rapidly changing environment. This issue has also been the subject of many recent articles and our firm was asked to comment on it earlier this month for an article appearing in the Wall Street Journal. News for Brokers, Wealth Managers and Their Clients. Wall Street Journal (November 4, 2011).

Like employees in many other industries, registered representatives use LinkedIn to maintain contact with other professionals, referral sources and clients. While the client’s LinkedIn profile is public, the firm has a responsibility to monitor communications between registered representatives and clients and will often claim that the client relationship was developed from firm resources. Problems arise when the registered representative leaves the firm to join a competitor, but retains access to his LinkedIn profile and contacts.

When the representative updates his LinkedIn profile to identify the new employer, LinkedIn will automatically send a message to every one of his contacts, which could include hundreds of clients still being serviced by the representative's former firm. Is this message a solicitation or merely an announcement? Is the LinkedIn contact list a trade secret? Can the employer assert ownership or control over the LinkedIn profile with contractual language that prevents post-employment use by the representative? Our firm recently handled a FINRA arbitration case in which one of the claims arose from LinkedIn messages such as these.

Brokerage firms, registered representatives, regulators and courts across the country continue to struggle with this issue. One thing is clear. The exponential growth of the Internet is continually eroding the confidentiality of information formerly protected as trade secrets. For example, in Sasqua Group, Inc. v Courtnery, Case No. 09-528 (S.D.N.Y. Sept. 7, 2010), an executive recruiting firm sought injunctive relief to prevent a former employee from using a contact database it claimed as a trade secret. At the preliminary injunction hearing, the former employee demonstrated that the same information could be ascertained from LinkedIn, Bloomberg, Google and other resources. Relying heavily on this testimony, the Court concluded that the information in the database was not a protectable trade secret.

This case would probably have had a very different outcome just ten years ago, but the proliferation of information available on the Internet through LinkedIn and other social networking sites undermined an essential element of the employer’s case – that the information was not generally known to or ascertainable by those outside the company. Employers seeking to preserve the secrecy of customer lists in this environment will need to take additional steps to protect the confidentiality of their information from disclosure through social networking programs.

Apr09

DAMAGES AWARDED BY FINRA PANEL FOR FAILING TO JOIN THE PROTOCOL

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If joining the Protocol will effectively transition a broker to a new employer without the fear or cost of litigation, can the new employer be held liable for failing to do so when its recruits are sued by their old employer? Maybe so. In an arbitration award issued in July, 2010, a FINRA panel sitting in Indianapolis ordered a broker-dealer to pay 2 million dollars to a pair of brokers it hired from Merrill Lynch for damages sustained in what appeared to be a botched transition. 

The award indicates that the claim was filed by NRP Financial, Inc., for recovery of sums due on promissory notes and stock purchase agreements. The brokers filed a counter-claim seeking 21 million dollars in damages allegedly sustained as a result of their transition from Merrill Lynch to NRP. Specifically, they alleged that NRP falsely represented that it was a Protocol member and prematurely announced the brokers’ move to NRP. According to the brokers, upon learning of their impending departure, Merrill Lynch promptly fired them and obtained injunctive relief that prevented contact with their clients for five further months, effectively decimating their book of business. 

The FINRA panel ultimately awarded 2 million dollars to the brokers and dismissed the claims for recovery on the promissory notes and stock purchase agreements. Of this amount, nearly $500,000 was awarded for attorney’s fees, costs and expenses. The case illustrates the sums at stake in securities recruiting cases. If properly executed under the Protocol, the transition probably would have occurred without litigation and the brokers would have had the opportunity to contact their clients and solicit their business following their resignation from Merrill Lynch.
Jan01

What is the Broker Protocol?

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Each year hundreds of Registered Representatives leave their firms to create new firms or move to other companies. Until 2004, these transitions were often accompanied by lawsuits. Former employers sought to enforce contractual non-solicitation and non-compete provisions limiting contact by the departing individual with their established clients. These suits could be costly and sometimes resulted in injunctions preventing the brokers from continuing to serve their customers. The Protocol for Broker Recruiting virtually ended this litigation among firms that chose to enter into the agreement. 

The Protocol was conceived and adopted in response to specific concerns that federal and state regulators raised regarding the movement of financial advisors from one firm to another. Some firms had been encouraging financial advisors to remove confidential client information when they changed firms. Others were suing their former employees to enforce restrictive covenants and asking for court orders to prevent the new firm from accepting client accounts. These orders had the affect of preventing customers from exercising their right to select the financial advisor of their choice, and during volatile times in the market, often left customers in limbo between the old firm and the new firm.

After various state regulators initiated enforcement actions against firms who had sought these court orders, The Financial Industry Regulatory Authority (“FINRA”) attempted to address the issue by adopting IM 2110-07 on December 21, 2001, now FINRA rule 2140. This rule change made it a rule violation to “interfere with a customer’s request to transfer his or her account in connection with the change in employment of the customer’s registered representative.” While rule did stop firms from seeking court orders to block the movement of client accounts, it did very little to reduce the expensive litigation that seemed to accompany every broker move and the potential exposure of confidential client information.

To address these issues, and avoid the potential of further regulatory action, a working group of lawyers representing Citigroup Global Markets Inc. (“Smith Barney”), Merrill Lynch, Pierce, Fenner & Smith, Inc., and UBS Financial Services, Inc. came together in the summer of 2004 to create The Protocol for Broker Recruiting. Adopted in August 2004, it has been generally described as a limited forbearance agreement, or covenant not to sue, between the companies that agree to join. So long as they follow the provisions of the Protocol, representatives leaving one Protocol firm to join another may retain a list and solicit their clients without fear of litigation and despite any terms to the contrary in their employment agreements.

While the original members assumed that the Protocol would remain an agreement between only the largest brokerage firms, it soon became an important tool for recruiting by investment advisors, regional firms, and even the smallest broker -dealers. In the last six years, over 600 firms have joined the Protocol and the list continues to grow every week.

Brokers and investment advisors are moving every day under the protection of the Protocol and litigation between member firms has dramatically decreased. There are, however, occasional problems. Lawsuits have been filed claiming breach of the terms of the agreement, alleging that certain individuals are not covered by the agreement, and complaining that brokers took information for other broker’s clients. Courts hearing these cases routinely cite to the terms of the agreement in their opinions. The Protocol has also been used against member firms who later attempt to sue brokers and advisors who move to non-protocol firms.

Our hope here at Carlile Patchen and Murphy is to become a library of all things Protocol. We will be posting cases of interest and other information regarding the Protocol specifically, as well as recruiting in the financial services industry in general. Carlile Patchen & Murphy has advised hundreds of brokers, advisors and their firms on transitioning registered representatives to new firms while avoiding costly litigation and down time. Let us put our expertise to work for you.


For more information on the Protocol or industry-related matters, contact Dennis Concilla or Doug Jennings at 614-228-6135.

Carlile Patchen & Murphy LLP’s Securities Litigation Practice Group has 25 years experience representing the securities industry and its employees in disputes involving employment agreements, restrictive covenants, unfair competition and trade secrets.