Brokers Switching Firms: The Protocol and Recent Developments

In August 2004, Merrill Lynch, Citigroup, and UBS entered a pact not to sue one another over client relationships in their wealth management businesses. This pact was known in the industry as the Protocol for Broker Recruiting or simply the Protocol. Under the Protocol, brokerages essentially agreed that individual brokers could move between firms and take their clients with them. Since 2004, more than 1,000 other brokerages have signed on to the Protocol. The Protocol ended much of the litigation among brokerages over departing brokers and trailing clients.

In recent days, however, news has surfaced that Bank of America / Merrill Lynch, one of e original signers of the Protocol, is chipping away at that long-standing truce. Specifically, Merrill has taken steps to protect clients referred to Merrill brokers by Bank of America branches. In recent months, Merrill has required its brokers to agree that these specific customers belong to the bank and that if brokers leave the brokerage they not take this specific customer information with them. This creates a good opportunity to revisit the general landscape of competition and broker mobility in the wealth management arena.

• Not All Firms are Protocol: Although more than 1,000 firms have signed on to the Protocol since its inception, not all firms are signatories. Yes, virtually all of the big boys are on the Protocol. But many smaller brokerages are not. The NRP case from a few years ago provides an excellent example. In late 2008, two brokers left Merrill for a small outfit called NRP Financial. NRP represented to these two brokers that it was a Protocol member. But it wasn’t. When the brokers left Merrill, Merrill sued and obtained an injunction that prevented the two brokers from taking their clients with them. At that point, NRP became involved in FINRA arbitration with the two individual brokers. NRP claimed the advisors didn’t deliver what they promised. The brokers claimed NRP lied about being on the Protocol and ultimately ruined their business. The brokers won and NRP wound up paying them $2 million. Bottom line: Even though the Protocol exists, not all brokerages have signed on. There is still tremendous exposure for firms that are not Protocol members.

• The Protocol and Raiding: Although the Protocol generally allows brokers to move between firms and take their clients with them, it does not immunize firms for raiding. The Protocol explicitly states that nothing in the agreement bars or otherwise prevents a firm from bringing an action against a rival Protocol firm for raiding. First things first: Raiding is an extremely squishy concept. There are two universes of raiding exposure: (1) raiding exposure where non-compete agreements are present (generally tortious interference) and (2) raiding exposure even absent non-compete agreements (generally as unfair competition in violation of an unfair trade practices statute). Looking at raiding in connection with the protocol makes it even more difficult: Ostensibly, under the Protocol, if one or two brokers switch to a rival firm and take their clients with them, that’s not a problem. But say a rival firm targets another brokerage’s Fort Lauderdale office and takes 5 of its key people? Or maybe 10 of them? Bottom line: Raiding is a squishy concept and the Protocol doesn’t clearly define what level of conduct amounts to raiding, thereby rendering the Protocol and its protections irrelevant.

• Who Owns the Clients: Many people in the industry are confused about the enforceability of non-compete and non-solicitation agreements in wealth management. Let me be crystal clear: The Protocol changed everything. Without the Protocol, firms could and would enforce non-compete and non-solicitation agreements against departing brokers. Let me explain via hypothetical: Client John has his money with Broker Joe at Merrill Lynch. Client John has a relationship with Broker Joe, personally, and not with Merrill as a brokerage. Who owns the client? I’ve talked to many brokers who say, point blank, Broker Joe owns the client because that’s his client and his relationship. Look: That makes sense from a practical standpoint. But that’s not necessarily the law. In fact, the question is extremely complicated. Let’s say Broker Joe brought Client John with him to Merrill from a previous brokerage. It’s possible that the relationship still belongs to Broker Joe (legally). It’s also possible that Merrill bought out Broker Joe and his business and as part of that deal Merrill now legally owns the clients. And what if Merrill gave Broker Joe that client? What if Client John contacted Merrill and Merrill routed the prospect to Broker Joe? That’s exactly the situation that Merrill Lynch is currently contemplating and the reason why it’s requiring brokers to sign new agreements. Bottom line: Just because the relationship is between the individual client and the individual broker does not mean that the law works that way. Legally, without the Protocol, brokerages could and would routinely enforce non-compete and non-solicitation agreements to prevent clients from following brokers out the door.

The upshot of all this: The Protocol ended much of the litigation over financial advisers switching firms and taking their clients with them. But not all firms are signatories to the Protocol. Further, some firms that are Protocol Members – like Merrill Lynch – have started to pull back from that truce. Beyond this, there is the issue of raiding, where there are not bright lines and clear rules. Any broker who is contemplating making a move and any firm that is looking hire talent away from rivals needs to take a hard look at the potential exposure. Blind faith in the Protocol and common sense about client relationships are no longer enough.  For more, watch this video:

Jonathan Pollard is a trial lawyer and litigator based on Fort Lauderdale, Florida. He focuses his practice on defending non-compete and trade secret claims. Jonathan routinely represents doctors, corporate executives and other high level employees who are switching companies, or, who have started their own ventures. Beyond litigation, Jonathan advises employees, companies and business owners regarding restrictive covenant issues in connection with employment contracts, separation agreements, hiring decisions, the purchase or sale of business interests and the execution of commercial leases. Jonathan has been interviewed about non-compete issues by reporters from INC Magazine, the BBC, the National Federation of Independent Business and The Tampa Bay Times. In addition to his background in non-compete and trade secrets work, Jonathan has broad experience as a competition lawyer, generally, and has litigated numerous cases under both the Sherman and Lanham Acts. He is licensed in all Florida federal and state courts and routinely represents clients in Miami, Fort Lauderdale, West Palm Beach, Fort Myers, Tampa, Orlando and Jacksonville. His office can be reached at 954-332-2380.