01
January
2011

What is the Broker Protocol?

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 effect 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 the 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 Registered Investment Advisors, regional firms, and even the smallest –financial services firms. In the last 11 years, over 1300 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.  Arbitration panels have also awarded damages against Protocol members who later sued brokers who moved to 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 at 614-228-6135.

Author; Dennis J. Concilla

About the Author

Dennis J. Concilla

Dennis J. Concilla

"It's important that I know my client's business as well as they do."

Dennis Concilla practices securities law at Carlile Patchen & Murphy LLP, where he heads the firm's Securities Litigation and Regulation Practice Group. His focus is in the area of securities industry employment arbitration and regulation. Dennis joined CPM in April, 1985. He has been listed in Best Lawyers in America® for several years and The Securities Law Practice Group recently received a top tier ranking from Best Lawyers in America®.

PROFESSIONAL EXPERIENCE
Dennis served as Legal Counsel to the Ohio Senate Majority, was District Director of the 12th Ohio Congressional District, and is a former Assistant Attorney General for Ohio. Dennis served as an arbitrator for the National Association of Securities Dealers and has appeared before FINRA, its predecessors, the NASD and New York Stock Exchange, the Commodities and Futures Trading Commission, the Securities and Exchange Commission, and the Ohio Division of Securities.

PUBLICATIONS AND SPEAKING ENGAGEMENTS
Dennis has spoken at NASD sponsored arbitrator training seminars throughout the Eastern United States and has been a presenter at the Ohio Division of Securities annual conference. Dennis has been featured as a securities litigation instructor for Continuing Legal Education seminars sponsored by the Columbus, Cleveland and Ohio State Bar Associations and has been a speaker at CLE seminars on Restrictive Covenants & Ohio Administrative proceedings.

PROFESSIONAL ASSOCIATIONS AND MEMBERSHIPS
Dennis is a member of the Securities Industry and Financial Markets Association, Compliance and Law Division, and the Ohio State, and Columbus Bar Associations.