FINRA Lawyer Blog
Ever since it was implemented, brokers have relied on the Protocol for Broker Recruiting to be able to take some of their clients with them when they leave a firm, but a recent ruling by a state court in Georgia might jeopardize the Protocol’s protections.
The Appeals court’s ruling concluded the case against four former Aprio brokers, who failed to give 60 or 90 days’ notice before moving to Morgan Stanley, as it was established in their employment agreements.
Instead of giving Avrio a heads up, they announced they were leaving and quit on the same day. As soon as they had a foot out the door, they reached out to all their clients, in an attempt to bring them over to Morgan Stanley. Naturally, many followed, and Aprio lost a significant amount of business.
Aprio argued in court that Morgan Stanley had convinced the brokers that the Protocol would protect them from legal action by their former employer, superseding the advance-notice requirements in their contracts.
The aim of the Protocol, which dates back to 2004, is to discourage litigation and facilitate brokers’ transitions between firms. For example, it establishes what kind of client info brokers can take with them when they leave one firm for another.
When Morgan Stanley opted out of the Protocol, they referred to it as, “no longer sustainable,” adding that their exit would enable them to “invest more heavily in its world-class advisors and their teams,” and foster growth.
As per the recent ruling, the Protocol does not absolve departing brokers of their duty to give advance notice to employers. In the words of Judge Christopher McFadden, “the Protocol does not categorically invalidate notice provisions in employment agreements.”
Strictly speaking, the recent ruling refers to Georgia, but it could potentially be cited by courts and FINRA arbitration panels all over the country to undermine the Protocol, which already suffered a great blow when other top wirehouses, like Citigroup and UBS, followed on Morgan Stanley’s footsteps and exited it too.
For registered investment advisers, McFadden’s ruling seems to offer renewed protection from client poaching. Aprio’s CEO Richard Kopelman referred to it as “meaningful decision for small and midsize firms, especially for registered investment advisers that can feel confident they’ll be protected.”
When a broker gives advance notice, firms can have time to take precautions and ensure they do not take all their clients with them.
For these reasons, brokers who are going through this stage are kept on the payroll but with few duties, so as to prevent their potential poaching efforts.
The claims against the former Aprio brokers is not the only one in the case. There is a separate claim against Morgan Stanley for encouraging the brokers to leave without giving the required advance notice.
While FINRA panels are unlikely to cite the recent ruling as a precedent on a regular basis, it is possible that some courts will, further complicating an already complex regulatory scenario.
Rob Herskovits is a NY based securities lawyer with a nationwide practice. Herskovits PLLC, which he founded and leads, represents financial industry participants in legal and regulatory enforcement actions. Connect with Rob