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.

Introduction

In 2004, three financial services firms devised a way to ease the transition of financial advisers from one firm to another. The three firms – Citigroup Global Markets (Smith Barney), Merrill Lynch, and UBS Financial Services – signed an agreement called the Protocol for Broker Recruiting (the “Protocol”). Since then, at least 153 financial services firms have signed the Protocol. The result has been a profound increase in the number of transitions and an equally profound decrease in the number of litigation filings in which firms have sought to obtain Temporary Restraining Orders (TROs) or other injunctive relief against their departing employees! By its express language, the Protocol protects transitioning financial advisers only when they comply with the terms of the Protocol in transitioning from one Protocol signatory firm to another. If one firm (or both firms) is not a Protocol signatory firm, then temporary restraining orders and other injunctive relief, as well as monetary damages for loss of business, continue to be remedies available to firms who elect to pursue their departing advisers. That said, recently several courts of equity have refused to grant injunctive relief to financial services firms that are Protocol signatories. That trend perhaps best is characterized as an unintended consequence of the Protocol that binds.

Protocol Basics

When the three original signatory fi rms created the Protocol, there was a great deal of speculation as to whether it would last. Th e thinking, at the time, was that each fi rm would need to refl ect on whether, in the months and years ahead, it would be a “net hirer” or a “net target” of employee defections. A “net target” fi rm would not accept the deal because the Protocol, in eff ect, was a litigation forbearance agreement. Giving up the right to enjoin transitioning fi nancial advisers leaving with “the fi rm’s customers” and to seek damages was not a decision to be made lightly. Nonetheless, and despite some early delays in signing on, most major fi nancial services fi rms, including all of the “wirehouse” fi rms (such as Merrill Lynch and Morgan Stanley), signed the Protocol. Since then, several (but clearly not all) other fi rms of all sizes have signed on. Th e result has been an employment transition expressway! Why? Th e principal goal of the Protocol, as noted in the opinions of numerous courts, is client choice. Th e Protocol expressly provides: Th e 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 Registered Representatives (“RRs”) between fi rms. If departing RRs and their new fi rm follow this Protocol, neither the departing RR nor the fi rm that he or she joins would have any monetary or other liability to the fi rm that the RR left by reason of the RR taking the information identifi ed below or the solicitation of the clients serviced by the RR at his or her prior fi rm. When RRs move from one fi rm to another and both fi rms are signatories to this protocol, they may take only the following account information: client name, address, phone number, email address, and account title of the clients that they serviced while at the fi rm (the “Client Information”) and are prohibited from taking any other documents or information. Resignations will be in writing and delivered to local branch management and shall include a copy of the Client Information that the RR is taking with him or her. Th e RR list delivered to the branch also shall include the account numbers for the clients serviced by the RR…. As stated, transitioning fi nancial advisers may take their client names, addresses, telephone numbers, email addresses and client account names/titles. Likewise, transitioning fi nancial advisers may share their personal sales production information with their new fi rm. On the other hand, transitioning fi nancial advisers may not take other account data, such as client account numbers, account statements or tax identifi cation numbers. Similarly, fi nancial advisers may not share with their new fi rms any client information prior to resignation. Of course, it is worth noting that nothing in the Protocol alters the common law duty of loyalty as it relates to prohibiting a fi nancial adviser from soliciting clients (to move their accounts) and staff (to join the new fi rm) before the adviser resigns. Financial advisers must resign in writing and attach copies of any client information that they are taking. While the fi – nancial adviser can and will bring a list of client account names/titles, he or she also will provide that list to the former employer but will add to it the client account numbers.1

Protocol Litigation Surrounding Non-Compliance

As one would expect, there has been litigation addressing whether transitioning financial advisers have complied with the Protocol, and what the consequences should be in the event that they have not so complied. Courts indeed have issued injunctive relief under these circumstances. E.g., A.G. Edwards & Sons, Inc. v. McCreanor, 2007 WL 2696570 (M.D. Florida) (temporary restraining order issued against advisers transitioning to Morgan Stanley). However, the terms of the Protocol deem advisers to be in compliance with the Protocol so long as the adviser “exercised good faith in assembling the list” of customers delivered to branch office management, and “substantially complied” with the requirement that only certain customer information be taken. Accordingly, other courts have not granted such relief – even in situations where, perhaps, it would have been warranted. For instance, in Merrill Lynch v. Reidy, 477 F.Supp.2d 472 (D.Connecticut 2007) the court was faced with deciding whether fi nancial adviser Brendan Reidy and his team should be enjoined in transitioning from Merrill Lynch to Morgan Stanley. Merrill Lynch cried foul and sued Reidy and his team, arguing that because they had not followed the Protocol, they were exposed to liability for breach of contract, as well as statutory and common law obligations. Merrill Lynch requested that the court issue a temporary restraining order and preliminary injunction. Th e court noted that such equitable relief is an “extraordinary and drastic remedy, one that should not be granted unless the movant, by a clear showing, carries the burden of persuasion.” Turning to the facts, Merrill Lynch argued that Reidy and his team had breached the Protocol by failing to provide adequate customer information to it upon resigning, by taking more client information than permitted, including account numbers, and by accessing and/or taking prohibited documents with them upon resignation, pointing to computer access records and printing histories. For example, one set of documents at issue included annual performance reviews. Reidy and his team had prepared them for 50 clients in the month prior to their resignation, without Merrill Lynch compliance approval as client correspondence. Th e court addressed each of the purported Protocol defi ciencies. Th e court determined that Reidy and his team substantially had complied with the Protocol. Additionally, the court concluded that there was a “legitimate dispute” about the scope of the client information that Reidy and his team had retained upon resignation. Notably, with respect to the annual performance reviews, the court stated that while such activity might have violated Merrill Lynch’s compliance policies, it did not rise to the level of a Protocol violation. Finally, the court found Merrill Lynch’s claim that Reidy and his team had retained client account numbers as “largely speculative.” Accordingly, the court held that Merrill Lynch had failed to meet its burden of proof for injunctive relief. Similarly, the court in A.G. Edwards v. Martin, 2007 WL 4180943 (N.D.Florida), based its decision to deny a request for a preliminary injunction on the fact that the document and information taking was “inadvertent” and quickly remedied by its return. In that case, adviser Frank Martin and his team transitioned to Raymond James & Associates. In doing so, they unquestionably took records and impermissible client information not permitted under the Protocol. However, the court stated: Here, the Defendants moved from one firm to another, both of which are signatories to the Broker Protocol. Thus, the Broker Protocol governs and Defendants are allowed to take certain account information. The Defendants admit to inadvertently taking documents that contain additional information, but have returned all documents containing the additional information. The Plaintiff has not shown that the Defendants still have in their possession any additional information. The Defendants have substantially complied with the Broker Protocol. Thus, the Plaintiff has not shown there is a substantial likelihood that the Plaintiff will prevail on the merits. Although the court opinion does not address it, presumably A.G. Edwards retained the right to seek damages (in arbitration).

Creative Applications of the Protocol Agreement

As one may expect, parties in litigation have argued that the Protocol eff ectively has become an industry standard. Consequently, parties argue that transitions in accordance with the Protocol should not be subject to injunctive relief, regardless of whether the parties’ contractual agreements provide for injunctive relief – and, more signifi cantly, even where both of the parties involved are not signatories to the Protocol. Th is creative argument has had moderate success. In Merrill Lynch v. Brennan, 2007 WL 632904 (N.D.Ohio), fi nancial advisers transitioned from Merrill Lynch (a signatory fi rm) to Bear Stearns (a non-signatory fi rm). Merrill Lynch sought a temporary restraining order for breach of contract, misappropriation and misuse of trade secrets, conversion of confi dential business information, breach of the duty of loyalty, and unfair competition. Merrill Lynch cited to its Financial Consultant Training Agreement with the defendants, in which they agreed, among other things, to document confi dentiality, non-solicitation and the issuance of a TRO or a preliminary or permanent injunction. To justify a temporary restraining order, the court stated that Merrill Lynch had to demonstrate: (1) a likelihood of success on the merits; (2) that it would be irreparably harmed in the absence of injunctive relief; (3) that greater harm would result to Merrill Lynch from the denial of injunctive relief than to the defendants where injunctive relief is granted; and (4) that the public interest would be better served by issuing a preliminary injunction. Merrill Lynch argued that it met each of those four elements. Th e court, however, found that Merrill Lynch could not demonstrate irreparable harm. 2 Damages are calculable, the court concluded, reasoning: Although this court found such arguments persuasive in 1998, the changed circumstances in the securities industry convinces the court that such arguments no longer merit such weight. Merrill Lynch v. Martin, No. 98 CV 1408 (N.D. Ohio 1998). To wit, in 2001 [sic 2004], Merrill, along with industry peers, signed the Protocol For Broker Recruiting (“the Protocol”). In essence, the Protocol allows brokers, under certain conditions, to bring client lists with them when transferring fi rms. Although Bear Stearns is not a signatory to this agreement, Merrill’s signature indicates that they understand the fl uid nature of the industry; brokers routinely switch fi rms and take their client lists with them. 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. Merrill Lynch also argued that the loss of goodwill was a source of irreparable harm; specifi cally, “allegedly suff ering a loss of customer trust and goodwill once it becomes clear that such confi – dential information was given to others (i.e. Bear Stearns).” Nonetheless, the court rejected that argument, commenting that the existence of the Protocol “signifi cantly undercuts the notion that such behavior destroys customer goodwill.” Th e court ordered the matter to proceed in arbitration where, if appropriate, Merrill Lynch could seek monetary damages for its alleged loss of business. Likewise, the court rejected Merrill Lynch’s eff ort to obtain a temporary restraining order in Merrill Lynch v. Brinkman, 2008 WL 4534299 (D.Arizona). Th ere defendants had transitioned to a non-Protocol fi rm, Robert W. Baird & Co. Merrill Lynch contended that it simply wanted to enforce its contractual agreement with the defendants, and that the Protocol was irrelevant. In an interesting twist, the court observed that even though Robert W. Baird was not a signatory to the Protocol, the defendants “would have been wise to have followed it and taken with them only the information allowed under the protocol.” In view of the fact that the defendants did more than what the Protocol allowed, among other reasons, the court found that Merrill Lynch indeed had shown the fi rst element of a temporary restraining order, probable success on the merits (“or at least that serious questions are raised”). Still, the court denied the issuance of a TRO, determining that Merrill Lynch had failed to show two other elements — irreparable harm as well as balance of hardship — notably without reference to the Protocol. As to irreparable harm, the court believed that “the identifi cation of lost clients and the determination of associated damages would not be diffi cult within the scope of the parties’ arbitration agreement. As to balance of hardship, the court noted that the loss of Merrill Lynch’s customers (the harm) already had occurred, whereas, “the harm to the defendants is that they likely would not be able to earn a living in their chosen fi eld for up to a year.” Observing that covenants not to compete are frowned upon, the court found that the balance of hardship did not “tip sharply” in Merrill Lynch’s favor. In Smith Barney v. Griffi n, 2008 WL 325269 (Mass.Super.), the court again was faced with a situation where a fi nancial advisor had transitioned from a signatory fi rm, Smith Barney, to a non-signatory fi rm, N.Y. Life. Th e court was faced with the usual arguments and responded that it had “struggled for many years with various motions, such as this, brought by fi nancial services companies seeking preliminary injunctions that would prohibit their departing fi nancial advisors from taking any client information with them and from soliciting their former clients to transfer their accounts to the new fi rm.” Th e court described fi ve reasons for this diffi culty. First, the enforcement of the confi dentiality and non-solicitation provisions “punishes the clients of the departing fi nancial advisors” as the clients’ fi nancial advisor “one day simply disappears without warning.” Second, citing the movie “Casablanca”, fi rms seeking injunctive relief simply are “shocked, shocked” that another fi rm would induce their new fi nancial advisor to breach his or her agreements with the former firm, yet “they are themselves engaged in precisely the same ‘shocking’ conduct.” Th ird, the non-solicitation agreements typically have been presented to fi nancial advisors when they fi rst commence employment, without separate consideration beyond continued employment, and without any choice apart from termination. Fourth, the legal justifi cation for such restrictions is to preserve the company’s goodwill, yet a company is not entitled to preserve the goodwill earned by its employee that fairly belongs to the employee. Fifth, and fi nally, there is a real question as to whether clients’ names, addresses and telephone numbers are confi dential. In addition to those fi ve generic reasons, the court wrote that in the case before it, another, sixth reason was present: Smith Barney was a signatory to the Protocol. While Smith Barney argued that the Protocol was “irrelevant to this motion for preliminary injunction because it is simply a forbearance agreement that does not apply here, since N.Y. Life is not a signatory”, the court nonetheless states that it does not agree that the Protocol is “inconsequential to the decision of whether preliminary injunctive relief equitably is warranted.” In fact, the Griffin court found that New York law (which governed the parties’ contract), like Massachusetts law, recognizes that a nonsolicitation agreement is an “ancillary employee anti-competitive agreement that will be carefully scrutinized by the courts.” As such, the court stated that – in determining whether to grant Smith Barney’s request for a preliminary injunction – it must examine not only whether the non-solicitation provision of the adviser’s employment contract was a reasonable restraint on the adviser’s ability to compete with Smith Barney, but also whether the court’s equitable power should be used to preliminarily enjoin violation of the adviser’s employment contract. In rejecting Smith Barney’s request for a preliminary injunction, the Griffi n court found that the Protocol indeed did shed light on three critically important questions: (1) Does Smith Barney regard Client Information, as defi ned in the Protocol, truly to be confi dential? (2) Is the non-solicitation agreement in the [employment] Contract truly necessary to protect the goodwill of Smith Barney? and (3) Is a preliminary injunction truly necessary to prevent a substantial risk of irreparable harm? Signifi cantly, the Griffi n court held that, in view of the Protocol, the answer to each of the aforementioned questions is a “no.” For example, with respect to Question No. 1, the court found that, by allowing its departing fi nancial advisers to leave freely with client information (pursuant to the Protocol), Smith Barney eff ectively has declared that it does not consider this client information to be “nonpublic personal information.” Hence, such client information cannot be characterized as “confi dential.” In sum, the court found that Smith Barney cannot have it both ways – declaring this information to be confi dential and, at the same time, permitting it freely to be taken to other fi nancial institutions by advisers departing for Protocol signatory fi rms. In Smith Barney v. Burrow, 558 F.Supp.2d 1066 (E.D. California 2008), the defendants resigned from Smith Barney (a Protocol signatory fi rm) on March 7, 2008 to become SEC-registered investment advisers doing business as Valley Wealth Incorporated (“Valley Wealth”). In arguing against the motion for preliminary injunction, defendants claimed that the Protocol was an “industry standard collective bargaining agreement” to govern “fi nancial fi rms in dealing with the modern trends of fi nancial advisors who change fi nancial fi rms and bring with them their clients.” Indeed, on the day that defendants had resigned from Smith Barney they had signed a Joinder Agreement to the Protocol for Broker Recruiting. Whether or not the defendants were signatories to the Protocol, Smith Barney argued that the defendants failed to abide by the terms of the Protocol. Nonetheless, the court found that Smith Barney failed to demonstrate suffi cient successes on the merits to satisfy that element for a preliminary injunction. First, citing Smith Barney v. Griffi n, supra, the court rejected Smith Barney’s argument that defendants had removed confi dential trade secrets. Th e court stated, “Given the Protocol, Smith Barney is hard pressed to convince this Court that information regarding clients whom [defendants] serviced qualify as Smith Barney’s confi dential trade secrets.” Elaborating, the court observed that defendants built up their clientele through their eff orts, and that one of the defendants brought (and was encouraged to bring) his clients with them initially when he transitioned to Smith Barney. Th e court also noted that Smith Barney had failed to pinpoint that it had spent substantial sums of money to develop defendants’ clients and, in any event, noted that Smith Barney had acknowledged that it purchases mailing lists – “i.e., public information to develop clientele.” Additionally, relying on the Protocol, the court determined that Smith Barney had failed to prove its claims of unfair competition as well as breach of fi duciary duty. Regarding unfair competition, the court states: Th e record before us indicates that [defendants] pursued clients whom they had serviced and developed while at Smith Barney. Smith Barney’s signing the Protocol indicates that it expected outgoing financial advisors to continue to service their clients and that such continuing service is not unfair competition. Smith Barney overplays its claims of deception. Regarding breach of fiduciary duty, the court wrote: Smith Barney’s participation in the Protocol diminishes its claims that [defendants] breached duties of loyalty, especially given that Smith Barney presumably benefi tted from [one of defendant’s] transfer of his Morgan Stanley clients to Smith Barney. At most, defendants and Smith Barney compete on a limited scale in a limited market. Defendants do not compete with Smith Barney in the national market to which it is privy. Clients are free to come and go among defendants, Smith Barney, and a myriad of other fi nancial advisors. Likewise, the court relied upon the Protocol to fi nd that there was no irreparable harm. Citing Merrill Lynch v. Brennan, supra, the court commented that, “Courts have become disinclined to fi nd irreparable, incalculable harm from fi nancial advisors’ departures.” In lieu of an injunction, the court off er invited Smith Barney “to seek compensation for proven economic harm” – in arbitration.

Strict Interpretations of the Protocol Agreement

Not all courts are so willing to overlook the contractual agreements between the fi rms and their fi nancial advisors, however. For example, in Hilliard-Lyons v. Clark, 2007 WL 2589956 (W.D.Michigan), the plaintiff seeking injunctive relief, Hilliard-Lyons, was not a signatory to the Protocol. Defendants transitioned from Hilliard-Lyons to Raymond James & Associates, a signatory fi rm. Arguing against the issuance of an injunction, including the enforceability of non-solicitation provisions in trainee agreements, defendants contended that the Protocol was signed by a majority of fi rms and such non-solicitation provisions were inconsistent with the Protocol. Th e court disagreed. Th e court stated that the Protocol applies, by its own terms, only when both fi rms are Protocol signatories. Distinguishing Merrill Lynch v. Brennan, supra, the court concluded that, unlike Merrill Lynch, Hilliard-Lyons did not “tacitly accept” the terms of the Protocol because it never had signed it. Th e Protocol, the court wrote, “is not intended to bind those fi rms who opt not to sign it.” Moreover, in Wachovia Securities v. Stanton, 571 F.Supp.2d 1014 (N.D.Iowa 2008), the court found the Protocol arguments unpersuasive even though the plaintiff , Wachovia Securities, was a Protocol signatory. Recognizing that the ruling was contrary to the ruling in Merrill Lynch v. Brennan, supra, the court wrote: Where both parties are signatories, they have essentially agreed to reciprocal “poaching” of registered representatives and the registered representative’s clients from the former fi rm, apparently on the assumption that they will gain as much as they lose in the exchange. On the other hand, where the new fi rm is not a signatory, the old fi rm has no reciprocal benefi t to look forward to, and a prohibition on solicitation of clients by a departing registered representative is still reasonably necessary to protect the former fi rm’s client base from “poaching” by the new, non-Protocol fi rm. 3 Th e court did, however, fi nd that the Protocol was relevant to its fi nding with regard to prejudice to the public interest. Th e court highlighted the fact that the Protocol “does recognize that its ‘principal goal’ is ‘to further the clients’ interests of privacy and freedom of choice in connection with the movement of their Registered Representatives (‘RRs’) between fi rms.” Th is and other facts, the court said, were “suffi cient to call into serious question the enforceability of those covenants.”

Conclusion

While we cannot be certain what the future holds (or even whether the Protocol will exist ten years from now), there can be no doubt that the Protocol has been nothing less than a “sea change” for the fi nancial advisers who seek to transition their books of business from one fi rm to another, and the securities broker-dealers and investment advisory fi rms that employ them. Th e ease with which departing advisers can transition their books of business – and the eagerness of fi rms to race to the courthouse for a TRO – greatly have been impacted by this so-called “forebearance agreement.” One thing is clear, based on the foregoing review of court opinions from throughout the country: the Protocol indeed has caused unintended consequences. While several courts have sought to protect the interests of non-signatories seeking to enforce their rights as against departing advisers, a signifi cant number of courts have relied upon the Protocol to deny injunctive relief – even where one (or both) of the parties at issue is a non-signatory to the Protocol. Whether that trend will continue remains to be seen, but the existing case law, discussed above, no doubt will continue to shape this debate in the years ahead.

Eccleston Law expects the wave of claims to recover benefits associated with FCAPP Growth Award and Wealthbuilder programs to continue, following a second large arbitration award rendered in favor of two former Merrill Reps.

Previously, an arbitration panel awarded two brokers a total of $1.17 million. The latest award is for $5.2 million in compensation damages and $5 million in punitive damages. According to the award, the basis for punitive damages was that Merrill Lynch directly and indirectly through its Senior Management intentionally, willfully and deliberately engaged in a systematic and systemic fraudulent scheme to deprive Merrill reps of their rights and benefits under its deferred compensation programs as well as other benefits to avoid liability after the change in control in September, 2008. Bank of America made fraudulent misrepresentations and coercive tactics against the reps to accomplish its unlawful objective.

If you are a former Merrill Lynch broker, please contact Jim Eccleston at the Eccleston Law Offices at 312-332-0000 to discuss your recovery options.

Investment News is reporting that Morgan Keegan producers may find the deal terms “disappointing”. They certainly aren’t as generous as what can be negotiated on the street.

For the largest producers, those with production more than $1 million, Raymond James will pay 70% of the trailing 12. 50% of trailing 12 month production will be paid to those producing between $500,000 and $1 million. The percentages fall from there for those with lower production.

Morgan Keegan reps certainly should retain legal counsel either to weigh the options for and negotiate a deal to move their books elsewhere, or even to negotiate a better deal with Raymond James. That seems to be an option that is in the cards, according to recruiters cited in the Investment News article.

Top producing transitioning advisers should expect to receive two and one-half to three and one-half times their trailing 12 month production, while top producing reps at Morgan Keegan reportedly are expected to be paid a mere 65% to 70% of their trailing 12. This disparity prompted Investment News this week, and several pundits, to begin speculating as to how many top producing reps will leave Morgan Keegan for greener pastures. Investment News went so far as to run a lead story on the matter, “RJ Buy May Be Tough Sell to Keegan Reps.” No doubt, Investment News and the pundits may be right. Indeed, Raymond James has built in clawback provisions in the deal to remedy any rep departures.

But there is much more to the analysis than just the mathematical, bonus percentage comparison. Beyond comparing the math, one needs to compare the terms of the promissory notes, the new firm’s employment agreement restrictions on solicitation, competition, confidentiality, and, of course, termination and TROs (court injunctions). That’s the starting point, for an analysis that we frequently are retained to conduct on behalf of reps contemplating a move. A move may make sense, but only after careful attorney analysis, as well as negotiation with the new firm (well in advance of the move date) to improve upon the always-one-sided contract provisions that firms try to have unsuspecting reps sign.

Raymond James announced that it has entered into a definitive stock purchase agreement to acquire Morgan Keegan for approximately $930 million. Morgan Keegan is believed to have upwards of 1,200 financial advisors who may be considering their options.

If you are an adviser at Morgan Keegan and are considering a transition as a result of this acquisition, please contact Eccleston Law for a FREE, no obligation consultation to discuss your options.
Eccleston Law Offices assists advisers nationwide in their transition. Working with recruiters nationwide, we negotiate the non-numbers parts of the deal, including the employee forgivable loan terms and the employment agreement. If you are a Morgan Keegan adviser contemplating a transition, or a recruiter with a candidate, contact Jim Eccleston at 312-332-0000.

Regulators Issued a joint statement on November 1st which reported that MF Global had “reported possible deficiencies in customer futures segregated accounts held at the firm.” The SIPC has filed an application with the court to commence liquidation of the firm.

In view of the above, Eccleston Law stands ready to assist investors unfortunate to have had an account with MF Global by prosecuting actions against those who have violated state or federal securities laws and regulations.

In addition, Eccleston Law stands ready to assist investors file claims with the SIPC and/or defend against SIPC actions filed against them.

James J. Eccleston
President

The sudden demise of MF Global raises a host of issues for advisers. As of November 1st, regulators plan to transfer customer accounts to another firm, and the SIPC has initiated the liquidation of the firm. Customer accounts are frozen. Press reports indicate that there are as much as $900 million in deficiencies in customer futures segregated accounts, about which regulators were not satisfied with the company’s lack of adequate documentation.

Arbitration actions to recover training costs and expenses always beg the question: how valuable was the training if the rep effectively failed the training program? Yet that basic inquiry does not stop the brokerage firms from attempting to collect training costs.

Recently, Wells Fargo sued an adviser for $75,000, plus $19,000 in interest and $21,000 attorneys’ fees, for a total of about $115,000. The adviser denied owing anything.

The FINRA arbitrator did award damages in favor of Wells Fargo, but not for what the firm demanded. The arbitrator awarded only $22,000 total ($12,000 in damages and $10,000 in attorneys’ fees).

That’s an 80% discount. Some would argue still too much to award a firm for its failed training program costs!

Despite market volatility, merger and acquisition activity among investment advisory firms showed strong numbers in the 3rd Quarter. At Schwab, for example, there were 17 deals in the quarter totaling nearly $17 billion in acquired assets under management. Year to date Schwab reports 44 deals totaling nearly 440 billion in assets under management.

The good news is that the robust activity is expected to continue.

That may be due in part to the average age of the RIA firm principal, which is 55 this year. It never is too early for investment advisers should plan their succession strategies. Those strategies may involve an internal plan or an external plan.

Finally, several firms nationwide have notified us that they are seeking to grow their businesses through acquisitions, and are “buyers” in this market. For further information about those buyers, please contact us.