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What Financial Advisors Should Know About “Protocol”

Apr 26, 2013 / Uncategorized

The Protocol for broker recruiting can be an effective tool for financial advisors to avoid the threat of litigation when switching firms. Nevertheless, it is important to understand that the “Protocol” is not a complete shield from potential litigation against the advisor. Before switching firms, advisors should be fully aware of what the Protocol is, how to follow Protocol, and how to minimize the risk of potential litigation.

The Protocol for broker recruiting was initially created by a conjunctive effort among Smith Barney (now Morgan Stanley), Merrill Lynch, and UBS. Adopted in August of 2004, the broker Protocol for broker recruiting began as a common understanding among signatories not to sue each other (or their advisors) as long as certain procedures and limitations were followed. Eventually, hundreds of other firms decided to also join the Protocol in an attempt to further reduce the expense in litigating particular issues between firms. Currently, the number of firms that are part of the Protocol exceeds 500.

Although the Protocol for broker recruiting is a fairly simple document, most advisors are not aware of its guidelines and limitations. Some of the most important ones are described below.

Protocol Affiliation
The most common mistake made by advisors switching firms is to assume that the firm they are leaving, as well as the firm they are about to join are both Protocol firms. Since joining Protocol is entirely at the discretion of the firms, an automatic Protocol assumption can be a costly mistake. If either the firm the advisor is transitioning from, or the firm the advisor is transitioning to is not a signatory of the Protocol for broker recruiting, the advisor may not be allowed to take any documents or information; not even their clients’ names. In fact, if the advisor takes any type of document or information (or any of his or her clients to his or her new firm), the advisor could be sued by their previous employer who may also seek an injunction to prevent the advisor from contacting the advisor’s clients.

On the other hand, there are some courts around the country that have determined a Protocol member firm may not be entitled to an injunction simply because the advisor transitioned to a non-Protocol member firm (because the Protocol member “tacitly accepts that the taking of client lists by departing brokers does not cause irreparable harm required for the Court to grant an injunction”).

Nevertheless, courts in most states have ruled that the “Protocol, by its own terms…applies only to those firms who sign it.” As a result, if one of the parties is not a Protocol firm, the advisor should be careful not to take any documents or information when leaving the firm.

If the financial advisor is able to confirm that the Protocol for broker recruiting applies, the next step is to determine exactly what the advisor is entitled to take as part of the transition. Set out below are some issues to consider when both the old firm and the new firm are part of the Protocol.

The Documents and Information the Advisor is Entitled to Take
A financial advisor needs to know exactly what documents and information he or she is entitled to take when transitioning between Protocol member firms. Taking too many documents or information can immediately waive the protections granted by the Protocol and the advisor may be at risk of litigation. As of the date of this article, the following are the documents and information that an advisor can take when switching between Protocol member firms:

  • Client names
  • Client addresses
  • Client phone numbers
  • Client email addresses
  • Account title of the clients that they serviced while at the firm

 

In most circumstances, advisors are prohibited from taking other documents or information. If the advisor decides to take more information that allowed under Protocol, the advisor may not only be exposed to potential litigation, but also to penalties and fines imposed by the Financial Industry Regulatory Authority (FINRA).

For instance, on March 23, 2013, FINRA’s Department of enforcement charged a financial advisor with violations to FINRA Rule 2110 due to the fact that—after he left his previous employer—the advisor took a flash drive containing clients names, addresses, account numbers, and social security numbers (among other sensitive private information). Although FINRA assessed a $10,000 fine and a 10 day suspension, the advisor could have been disciplined with a much higher fine and even a permanent ban from the industry.

The Procedures During and Following Transition
The Protocol for broker recruiting also requires advisors to follow specific procedures during and after the transition. These procedures should be strictly followed by advisors in order to prevent the advisor’s previous employer from alleging that Protocol has been waived.

First, the financial advisor’s resignation should be in writing and delivered to the local branch manager. Resignation letters should be clear and concise; lengthy resignation letters increase the chances for potential liability. Click here to read some helpful suggestions when drafting a resignation letter.

Next, the advisor’s resignation letter should include a copy of the client Information that the advisor is taking. The advisor should also include the account numbers for the clients serviced by him or her. Nevertheless, the account numbers should not be taken by the advisor when leaving the firm. In the event that the firm does not agree with the advisor’s list of clients, the advisor will nonetheless be deemed in compliance with the Protocol as long as good faith was exercised in the assemply of the list (and substantially complied with the other requirements outlined above).

Additionally, the financial advisor cannot contact any of their clients until he or she is fully employed by the new firm (if the advisor wants to remain in compliance with Protocol). Once at the new firm, only the advisor has the power to contact his or her own clients. No other advisor or employee at the new firm is allowed to contact the clients.

Although the above topics do not encompass an exhaustive list of all the issues advisors should be aware of when dealing with Protocol related transitions, the list provides a starting point for advisors to consider the safe harbors that the Protocol offers. We encourage financial advisors to look at other resources found throughout this site and to seek the guidance of counsel in advance to review and advise them on the contractual obligations as well as Protocol adherence for a successful transition.

The Vernon Litigation Group’s financial advisor employment team of attorneys continues to represent financial advisors nationwide in disputes against their current or previous employer in cases of transition disputes, promissory note disputes, wrongful termination, U5, CRD, and other defamatory disclosures, discrimination, and other employment related abuses by the financial institutions.