In early 2009, 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.
Moreover, at the time I also spoke of an “unintended consequence.” That is, non-Protocol signatories, faced with litigation, began 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 at that time that such a creative argument had experienced considerable (though certainly not universal) success in the courts.
For example, in Merrill Lynch v. Brennan, 2007 WL 632904 (N.D.Ohio), financial advisers transitioned from Merrill Lynch (a signatory firm) to Bear Stearns (a non-signatory firm). The court denied the request for injunctive relief, 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, in Smith Barney v. Griffin, 2008 WL 325269 (Mass.Super.), a financial advisor had transitioned from a Protocol signatory firm, Smith Barney, to a non-signatory firm (N.Y. Life). The existence of the Protocol led the court to conclude that: (1) Smith Barney did not regard certain client information, as defined in the Protocol, truly to be confidential; (2) the financial adviser’s non-solicitation agreement truly was unnecessary to protect the goodwill of Smith Barney; and (3) a preliminary injunction truly was unnecessary to prevent a substantial risk of irreparable harm.
In examining more recent court opinions one and one-half years later, it appears that the trend continues towards deeming the Protocol to be an industry standard for transitioning financial advisers. Let’s overview the Protocol and discuss some recent court opinions.
Although the Protocol began in 2004 with just three financial services firms signing on – Citigroup Global Markets (Smith Barney), Merrill Lynch, and UBS Financial Services – there now are 530 signatory firms to the Protocol! The principal goal of the Protocol, as noted in the opinions of numerous courts, 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 prior firm.
To take 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.
Finally, the Protocol expressly does not protect against injunctive relief and damages for what the securities industry calls “raiding” cases. Those cases are not easily defined, but normally “you know ‘em when you see ‘em.” They occur when a financial services firm loses so many of its advisers to a competitor that a “severe economic impact” results. That impact has been quantified as approximately 40% of a business unit’s production, but the percentage varies and the determination depends upon what kind of “improper means” was employed and/or the degree of “malice/predation” that existed.
More recent court opinions include Merrill Lynch v. Baxter, 2009 WL 960773 (D.Utah). In that case, Merrill Lynch sought injunctive relief against a financial adviser who had transitioned to a non-Protocol firm, Ameriprise Financial Services. Relying upon the Protocol and Smith Barney v. Griffin, the court denied the request for injunctive relief, 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.” Likewise, in Smith Barney v. Darling, 2009 WL 1544756 (E.D.Wis.), Smith Barney sued financial advisers who had transitioned to a non-Protocol firm, Robert W. Baird & Co. The court relied upon the Protocol, Smith Barney v. Griffin and Wisconsin law to deny a TRO request as to client names, addresses, telephone numbers and email addresses.
There can be no doubt that the Protocol has been nothing less than a “sea change” for the financial advisers who seek to transition their books of business from one firm to another. 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.
