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!
