Securities Industry Employment Disputes: Protocol for Broker Recruiting

Rob Herskovits, the go-to securities lawyer for employment disputes, looks at FAs changing jobs and the effect of employment agreements they signed with a broker-dealer. Rob addresses non-competes, non-solicitation rules and realities, and other issues including the Protocol for Broker Recruiting. What happens when an FA leaves a Protocol signatory firm? And what are the real-world exceptions to those rules? Get answers on this element of Securities Industry Employment Disputes: Broker Recruiting Protocol from securities employment dispute attorney Rob Herskovits.

Hi, this is Rob Herskovits. People call me on a regular basis – FA’s (Financial Advisors) who are considering leaving their current employer and joining a new brokerage firm. And, one of the things that’s we’ll often talk about is, first, whether or not the FA has any type of employment agreement with their current firm, because it’s not unusual for Broker-Dealers to ask employees to sign agreements that contain restrictions which would limit the person’s ability to do certain things on a post-employment basis.

But, let me be specific about what I’m referring to there. Oftentimes, you’ll see either a non-compete clause which could say that the FA is not entitled to work for a competitor for a certain period of time and within a certain geographic region.

It could include a non-solicitation clause which says that the FA is not entitled to request that customers of their former Broker-Dealer transfer to the new Broker-Dealer, and it could include a clause which suggests that the FA can’t induce employees to join him or her at the new firm.

So, there’s an important agreement of sorts that is utilized in the securities industry which directly impacts upon these types of restraints. And, that’s called the Protocol for Broker Recruiting.

So, the Protocol was born out of a fairly simple problem and, historically, what used to happen is if, for example, a team of FA’s left Merrill Lynch and joined UBS, Merrill Lynch would sue them and would sue UBS, and a settlement would be struck and, then, the week after, a team of FA’s would leave UBS and go to Merrill Lynch, and then the reverse would happen. Each firm was suing another and then getting sued by that same firm, and the brokerage firms found themselves writing checks and receiving checks.

And, I think they all sort of landed in a place of, “What’s the point of all this?”

And, so, they reached an agreement called the Protocol for Broker Recruiting, and what that agreement says is that if the FA leaves a firm that is a signatory to the Protocol and joins a firm that is a signatory to the Protocol, so long as they resign in conformity with the Protocol, that FA is free to solicit customers that he serviced at his former firm.

Now, there’s some important considerations here. The first is that, in order to invoke the protections of the Protocol, you need to act in accordance with the Protocol. So, that would mean that you would need to resign in writing. You would need to resign to local branch management. And, with the resignation, you would need to provide a client list which contains certain pieces of information that are set forth in the Protocol. And, that would be customer name, account title, phone number, email address, etc. And, you’re not permitted to take with you any sorts of documents or information that would be confidential and proprietary to the firm.

The departing FA can take only, essentially, their resignation letter and the information that they are permitted to take under the Protocol.

So, if an FA does, in fact, resign in conformity with the Protocol, then the essence of that agreement is that they do so and do not have to fear litigation from their former firm.

Unfortunately, I’ve seen instances in which FA’s don’t resign in conformity with the Protocol or join a firm that’s not a signatory to the Protocol and, then, of course, they don’t enjoy any of the protections of the Protocol.

Recently, though, I’ve seen an interesting dynamic as it relates to the Protocol that some firms are trying to, in essence, carve out certain employees from being able to invoke the Protocol. Now, if a firm is going to play by the book, and if a firm wants to designate a certain group of employees as non-Protocol employees, yet these people are Financial Advisors, then the firm would need to place some limitations on its agreement to be part of the Protocol and notify other signatories to the Protocol that, “Look, we’re participating in this, but our participation is not absolute, and there are limitations.”

But, there are instances in which that type of notification does not go out, and firms seem to, as I said before, sort of carve out either FA’s or groups of FA’s on almost a one-off basis.

That’s a situation that would give rise to some litigation, and I’m not sure that the firms that do that are ultimately going to be successful in being able to carve out certain groups of FA’s without having given notice to the other signatories to the Protocol that they’ve done so.

But, the bottom line, when it comes to resignation from a brokerage firm is to be exceptionally careful.

There are distinctions between types of brokerage firms. There are the wirehouses which, generally, adopt the position that the accounts of the Financial Advisor are, in essence, his or her accounts that were generated as a result of his or her activity.

But, there’s a fundamental distinction between sort of the traditional wirehouse model and, say, the model that has been used for many years by a place like Fidelity. Fidelity would take the position that, “We spend tons of money on commercials, and we have store front, street-level office space.” And, when people open up an account at Fidelity, for example, they would likely argue, they do so because of the Fidelity name and not because of any given FA.

And, those accounts, they would say, are our accounts and, for that reason, Fidelity and firms like Fidelity, will never join the Protocol, because they will, essentially, move heaven and earth if an FA leaves and tries to take their accounts. They will instantly go to court and seek a temporary restraining order and initiate a FINRA arbitration.

So, when an FA is considering leaving to join a new firm, there are a host of considerations, ranging from the type of firm they work at, any employment agreements that they may have, and the manner in which they go about resigning. And, those are some of the things that we do at my firm, and we’d certainly welcome calls from anyone who has questions about joining one firm or another. I appreciate you tuning in.