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As stated in Investment News, after 14 years of “peace” and relative tranquility pertaining to the recruitment of wealth managers, broker-dealers are back to warring with departing brokers and each other over the retention of client assets. The infighting within wealth management stems from the decisions of Morgan Stanley and UBS, two of the largest brokerage firms in the country, to exit what is known as the Protocol for Broker Recruiting or the “Protocol”.
As stated in the protocol, notwithstanding any restrictive covenant the broker signed, when a registered representative moves from one protocol firm to another protocol firm they may retain the following client information: name, address, phone number, email address, and title of the accounts she serviced at the firm. When a broker leaves, a letter of resignation is to be submitted to the branch manage with a list of all clients whose information that the registered representative is taking. A broker who exits his firm with any other information, such as account numbers or account documents, would still be subject to legal action from his former employer.
Since 2004, the recruiting protocol essentially acted as a peace treaty. However, the system was far from perfect. Some larger broker dealers, such as Charles Schawb, did not participate. Protocol signatories JP Morgan Chase and Merrill Lynch were accused of taking advantage of the rules. Merrill Lynch, for instance, had a set of rules connected to the individual broker’s book of business and a separate code of conduct for private bank clients. JP Morgan similarly stated that they had the right to recruit other signatories without being subject to legal action from other wire houses, but that their private bank brokers and clients were not included in protocol.
In October 2017, Morgan Stanley announced it was exiting the protocol. UBS followed suit three weeks later. On January 8, 2018 Citigroup also departed, citing their desire to reinvest assets into financial advisor teams already present at the firm. Merrill Lynch and Wells Fargo have indicated their willingness to stay. The pact still has over 1,700 signatories, but many have questioned the viability of the protocol moving forward.
Since leaving the protocol, Morgan Stanley has been filing court actions in order to prevent brokers from departing with client information and seeking temporary restraining orders against departing brokers. In one recent example, Morgan Stanley filed a TRO in New Jersey federal court against a former broker who left the firm for the Commonwealth Financial Network. The New Jersey District Court judge ruled that the former Morgan Stanley broker would have 24 hours to return any documents or emails taken, and that the broker was prohibited from using confidential client information to solicit his former clients to join him at his new broker dealer. The judge’s order did permit the broker to retain information which had been provided by customers.
The fundamental issue, as these legal battles continue, will be whether it was equitable for Morgan Stanley, or any of other broker dealers who have departed the protocol, to have recruited a financial advisor on the premise that protections afforded under the protocol would be in place should the broker later desire to leave.
Thus far this issue has not troubled many judges, since there have been several reported instances in which courts have enforced restrictive covenants and entered TROs against departing brokers.
Any broker from a non-protocol firm who is contemplating leaving should contact experienced securities employment attorneys such as Lubiner, Schmidt & Palumbo prior to resigning to discuss her rights and obligations under the terms of their restrictive covenant/employment agreement.