Some brokers are eroding “The Protocol for Broker Recruiting,” an agreement among firms that allows registered investment advisors to transfer between participating companies without lawsuits or arbitration.
In the past, the Protocol was used to ease the ability of the big firms to recruit. Now, however, the Protocol is also being used by advisors to break away on their own, and some Wall Street firms are taking steps to prevent that and weaken the Protocol in the process.
When the Protocol went into effect in 2004, it was essentially a “cease fire,” among three of the biggest wirehouses, according to Patrick J. Burns, Jr. a Beverly Hills, Calif. attorney and the author of a white paper, titled, “Opening the Floodgates to Independence: The Brief History and Impact of the Protocol for Broker Recruiting.”
Since that time, however, more advisors have been leaving for smaller, independent firms, and the number of companies belonging to the Protocol has risen dramatically, leading, in some cases, to new and creative interpretations of the rules, he said.
The most high profile recent incident occurred at U.S. Trust, a unit of Bank of America.
U.S. Trust is not a member of the Protocol, and it issued a memo stating that its employees are not protected by the agreement and broadening the number of employees covered by its so-called “Garden Leave” policy that requires departing advisors to give a sixty-day notice, during which they still received base pay but are unable to contact their clients. At the time U.S. Trust said that this was not a new policy, but merely the merging and expansion of some existing policies.
These types of “Garden Leave” provisions are commonly applied to high- level executives, Burns said, but not usually used for advisors, who would likely find that their clients had been reassigned to other advisors at their old firm long before they could be contacted.
However, some former U.S. Trust brokers have contended that because their securities licenses were through Merrill Lynch, also a unit of Bank of America and a Protocol member, they qualified for Protocol protection as well.
A court case involving Dynasty Financial Partners, a new registered investment advisor in New York, and two former U.S. Trust employees who joined Dynasty, was settled in January. The white paper says that many industry observers believe that U.S. Trust’s memo about Garden Leave was in response to this case.
Burns said, however, this is not the only instance of firms playing a little loose with the Protocol agreement. He said he has seen a promissory note issued to new financial advisors by a Protocol member company he declined to name that stated that departing advisors would not have any right to claim protocol protection until they had settled the note. This effectively cancels the Protocol for many advisors at that firm, he noted.
Under the Protocol, departing advisors are able take certain basic client information, including the clients’ names, addresses, phone numbers, email addresses and account titles without fear of reprisal from their old employer. They are not permitted to take social security numbers, account numbers, or copies of any statements or financial documents.
Without Protocol protection an advisor could face lawsuits from their former employer if they contact clients, Burns said. A hiring firm may think it’s getting a new employee with a list of clients just to discover that is not the case.
Part of the problem, Burns said, is the nature of the Protocol. “It’s not regulated – it’s just an agreement among the member firms,” he said. And there is no process in place for amending the Protocol, or what to do to members that deviate from or violate it.
Joining the Protocol is easy. Firms just need to notify the Securities Industry and Financial Markets Association that they wish to be added to the Protocol and complete a joinder form. There is no cost to join and no known formal review process for members.
When the Protocol was first developed it was an agreement among just a few companies, Burns noted, which made discussions about any issues likely easier.
Now there are 650 companies involved, including broker-dealers and independent firms as well as the big wirehouses, so he believes there needs to be a system for enforcement.
Burns said that if the companies that are amending the Protocol “are not being called on the issue it will probably lead others to come up with their own unique interpretations.”
And he says that it is a mistake, because erosion of the Protocol may end up bringing back the era where firms were forced to spend a lot of time and money suing each other over recruiting practices, and advisors themselves could not move as easily between jobs without fear of reprisal.