Broker Recruiting Protocol Losing Sizzle, But Only Among Firms Not Growing By Acquisition

The Protocol makes sense for firms growing by acquisition; it’s a free pass out of the court system, TROs, injunctions and arbitrations. Simply put, if a firm believes that it will gain more advisers from the competition than it will lose to the competition, the Protocol makes good sense.

Firms that are not members of the Protocol also may decide to join. And current members may decide to end their participation. That said, no wirehouses have indicated an interest in ending their participation.

While the Protocol paves the way for easier transitions, no transition is easy. Advisers need to follow the specific requirements of the Protocol. Aggressive firms that have lost an adviser surely will seek to find evidence that an adviser exceeded what the Protocol allowed, and will march into court seeking a TRO and damages. Advisers must retain competent securities counsel well in advance of any move to a new firm, Protocol or not.

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BROKER’S WORLD: I Signed What? Bonus Contracts May Surprise

Advisers who walk out of a brokerage without paying back a bonus may confront a legal hurdle they hadn’t expected.

According to bonus contracts reviewed by Dow Jones and several securities lawyers, at least some advisers in recent years have waived their right to file counterclaims against their ex-employer in arbitration proceedings that involve unpaid bonuses.

This clause appears in at least some Morgan Stanley Smith Barney bonus contracts dating back as far as 2009, but it’s unclear if it’s standard language in the company’s contracts. The clause hasn’t attracted much attention, perhaps because it isn’t prominent in the contract and because few brokers who signed it have moved to other firms at this point.

Under these contracts, if an adviser leaves the company without repaying a bonus, and the brokerage takes the adviser to arbitration to reclaim the money, the adviser can’t respond with direct counterclaims unless it’s simply a claim to prove that they did repay the bonus.

Brokers who have other grievances would have to file claims in separate proceedings. Counterclaims, an important negotiating tool for brokers in bonus cases, can involve complaints about failed promises, like a promotion that didn’t come through. They’re often the type of grievance that wouldn’t warrant filing a separate case, which typically involves more time and expense, lawyers say.

Quietly getting advisers to waive their counterclaim rights has other distinct advantages for a brokerage. Straightforward bonus cases can get fast-tracked by the Financial Industry Regulatory Authority, the Wall Street self-policing watchdog that runs the securities industry’s mandatory arbitration process. So if a brokerage can eliminate counterclaims, it’s likely to recoup its money months sooner.

Dow Jones interviewed over half a dozen lawyers for this story, and nearly all of them said it’s unusual for a brokerage to include a no-counterclaim clause in a bonus contract. However, a couple of them said it’s not uncommon. David S. Rich, a New York-based employment and business litigation lawyer called the clause “one of a number of provisions in a promissory note contract that brokers don’t give sufficient thought to” before entering the deal.

MSSB, a joint venture between Morgan Stanley (MS) and Citigroup Inc. (C), appears to be the only big brokerage using this clause. The company declined to comment for this story.

A spokesman for Wells Fargo Advisors said it doesn’t have a provision like this in its contracts, while UBS AG’s (UBS) UBS Wealth Management Americas says it used to have a clause like this, but started using a new format in September 2009 that no longer includes the provision. Bank of America Corp.’s (BAC) Merrill Lynch declined to comment, but a source familiar with the matter said the brokerage doesn’t use this clause.

If the clause used by Morgan Stanley Smith Barney isn’t knocked down by arbitration panels–and at least one panel has let it stand–it wouldn’t be surprising if more firms follow MSSB’s lead.

Bonus contracts are a big source of legal wrangling when advisers switch companies. Lucrative bonuses are a key way brokerages attract and retain talented advisers. But these bonuses have strings attached: They come in the form of a loan that is gradually forgiven over the life of a contract, often seven years. If an adviser leaves the company before the contract ends, they owe the balance of the loan.

Several lawyers think that the no-counterclaim clause may not hold up to legal challenge. They cite a fundamental legal principle recognized in state and federal courts, called the “entire controversy doctrine,” which requires that all aspects of a legal dispute involving the same parties be presented in one case.

But at least one attempt to cite that principle failed. James Eccleston, a Chicago-based securities and financial-services lawyer, says he had a client who left MSSB last year without repaying a retention bonus, and MSSB filed an arbitration claim with Finra to seek repayment.

Eccleston received notice that MSSB had asked Finra to defeat the counterclaims, citing the waiver the adviser had signed. Eccleston argued the entire controversy doctrine before the panel, but the arbitrators still sided with MSSB. The case was eventually settled, in part because the counterclaims were defeated, he says.

It may be in their interest to say so, but the lawyers note that the clause shows how important it is for brokers to have an attorney check out legal documents they’re planning to sign. “We would never counsel a client to sign a contract with that in it,” Eccleston says.

By Jennifer Hoyt Cummings


(Jennifer Hoyt Cummings writes about financial advisers and their jobs, with a focus on news and trends related to large retail brokerages. She covers topics such as adviser compensation, management structure, regulation, products, technology, recruitment and best practices. Jennifer can be reached at 212-416-2474 or by email at You can also follow Broker’s World on Twitter @BrokersWorld.)

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Financial Advisers in Employment Transition; A Primer on the Protocol

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 75 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 T.R.O. litigation filings!

Pre-Protocol (and not so long ago), financial services firms retained law firms to be “on-call” nationwide for emergency court filings designed to enjoin departing employee financial advisers from leaving with “the firm’s customers.”  Of course, the financial services firm to which the financial adviser was transitioning would argue that the adviser had every right to transition with “his or her customers.”  Time and time again, firms replaced Legal Brief “A” with Legal Brief “B” depending upon whether they were losing, or gaining, a financial adviser and his or her customers!  The situation transpired this way over and over again, with no firm being a clear winner or loser, because a firm that would gain customer accounts one day might lose a different set of accounts another day.  Cynics observed that the only ones making money were the lawyers.  In any event, the great majority of cases settled, either for a substantial sum of money when an injunction was granted, or for a less-than-substantial sum of money when the injunction was denied.

At the time when the three financial services firms signed the Protocol, there was a great deal of speculation as to whether it would last.  The thinking was that each firm would need to reflect on whether, in the months and years ahead, it would be a “net hirer” or a “net target” of employee defections.  A “net target” firm would not accept the deal because the Protocol, in effect, was a litigation forbearance agreement.  Giving up the right to enjoin departing financial advisers leaving with “the firm’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 financial services firms, including all of the “wirehouse” firms, signed the Protocol.  Since then, several (but clearly not all) other firms of all sizes have signed on.

The result has been an employment transition expressway!  Why?  Let’s examine what the Protocol allows financial advisers to take with them.  First, departing financial advisers may take their client names, addresses, telephone numbers, email addresses and client account names/titles.  Likewise, departing financial advisers may share their personal sales production information with their new firm.  On the other hand, departing financial advisers may not take other account data, such as client account numbers, account statements or tax identification numbers.  Similarly, they may not share with their new firm 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 financial adviser from soliciting clients (to move their accounts) and staff (to join the new firm) before the adviser resigns.

Second, the Protocol details the process to be followed in transitioning.  First, financial advisers must resign in writing and attach copies of any client information that they are taking.  While the financial adviser can and will bring a list of client account names/titles, he or she will provide that list to the former employer but will modify it to include the account numbers.

Third, the Protocol expressly does not protect against T.R.O. litigation for what the securities industry calls “raiding” cases.  These 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.

Fourth, the Protocol does not alter any contractual obligations that financial advisers may have to their former firms by virtue of promissory note or retention bonus agreements that they signed.  Likewise, the Protocol does not shift responsibility for any trading errors that might have occurred at the former firm.  There may be defenses to each of those scenarios, but they will not be found in the Protocol.

Finally, by its language the Protocol protects departing financial advisers only when they are leaving a Protocol signatory firm for a Protocol signatory firm.  If one or both firms is not a Protocol signatory firm, T.R.O. litigation and damages are available.  That said, recently several courts of equity have refused to grant injunctive relief to financial services firms that are Protocol signatories.  That case law is relatively new but a trend is developing.

Financial advisers now have one of the greatest opportunities to transition to a new firm.  But they better do it right, with the assistance of capable securities employment counsel familiar with the Protocol!

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Beware of Garden Leave Provisions that Interfere With Servicing Accounts

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.

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What Every Adviser Should Know About Recruitment Bonuses

Adviser recruitment programs today typically feature a variety of incentives to move from firm to firm, including signing bonuses as well as back-end bonuses.

In today’s highly competitive environment, typical signing bonuses are running between 100%- 150% of the trailing 12 month production. These signing bonuses generally require the adviser to transfer a certain percentage of their assets within the first year to qualify for the back end bonuses along with a certain percentage of gross production within the first year of employment.

Unlike the signing bonuses, typical back end bonuses can extend for 3-6 years and are based on hitting various asset and production goals. For example, a typical back end bonus could require that the broker bring in more than 75% of assets from the previous firm within twelve months, and produce about 75% of the trailing twelve months commissions during the first year. Thereafter, the expectation is typically that the broker will produce 95% of the onboard gross production during the second year, 120% the third year, and so on.

The back end bonuses can add up to as much as 150%, making the total transition bonus package worth anywhere from 250% to 300%.

Although these recruitment programs may seem very attractive, they are generally reserved for some of the industry’s most successful advisers. Moreover, firms are targeting those advisers that are fee-based and that have average revenue to asset ratios. Firms are also targeting those advisers who they are willing and able to sign longer term contracts which range anywhere from 8-10 years.

Such recruitment bonus programs have not gone without concern by industry regulators. SEC Chairman Mary Schapiro recently commented that today’s recruitment programs “compensate and incentivize people who take short-term risks at the expense of the long-term franchise and at the expense of investors”. Although brokerage firms typically give new recruits ample time to transition so that they are not pressured to overtrade in their client accounts to meet production goals, regulators fear that such programs may lead to churning. However, most firms have watched the account turnover ratios for new transitional hires very carefully to combat this fear.

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