Robert W. Pearce, a Florida based securities lawyer with a practice that  includes representation of broker-dealers and financial advisors  answers one of the more frequently asked questions: What is the protocol for recruiting brokers?

Video Transcript

My name is Robert Pearce and almost every week, I receive a telephone call from a financial advisor or stockbroker that’s leaving their brokerage firm, and asking me about what they can or cannot do when leaving the firm for another and they often bring up the Broker Protocol agreement. So, what is the Broker Protocol agreement?

First, I’d like to give you a little history. I’ve been practicing for 40 years now. During the first 25 years of my career, there were a lot of disputes between brokerage firms whenever one broker left for another. And the reason was that they always fought over the clients who were free to leave at their whim. They didn’t have to travel with the broker to a new firm. They could stay there. They could go anyplace else.

But employment contracts often dictated who owned the customer information that was necessary to transfer accounts so brokers could not legally take it and when clients tried to get it from the brokerage firms, they were often discouraged by the firm they were currently with to not to transfer their accounts. There were also non-competition and non-solicitation agreements and employment agreements that brokers had with their firms that interfered with the transition. Notwithstanding, brokerage firms that wanted to recruit brokers and offer big bonuses to get them were willing to take on the litigation expense to get this broker with the production and these battles went on and on and on for years.

Now, before the battle started, generally, the scenario was that the broker who was recruited by another firm would go into the office secretly at night, hand-write customer information or print information off the computers, and then, go home, and give the information to the broker-dealer that was recruiting him/her. They would prepare the account transfer (ACAT) sheets, and the broker would contact his client and say, “Listen, I’m leaving, here is a form to sign to transfer your account,”  and then, the broker would disappear; he/she would never come back to the office, and the recruiting firm would get a head-start, a jumpstart try to transfer these clients almost immediately to the recruiting firm.

Meanwhile at the departing firm, the firm where the brokers recruited from, would go into court and file a motion for restraining order, and litigation would ensue. It was a great time for lawyers because there was a lot of litigation, a lot of attorney’s fees, it was very expensive. This expense was in addition to the huge bonuses that were being paid by the brokerage firms that carried on this way. Now, also, in connection with this litigation, as soon as the broker departed, the firm that employed him would set teams of brokers and assistants, making phone calls to their brokers’ customers, and often, those brokers and assistants disparaged the departing broker who countersued and added another layer of litigation issues in these types of disputes.

So, what happened? Back in 2004 or 2005, Smith Barney, now known as Morgan Stanley, Merrill Lynch and UBS said, “Listen, we’ve had enough of this litigation. We’re suing you when team A leaves. You’re suing us when team B leaves you. We’re incurring a lot of attorney’s fees that we don’t need to. Let’s come to an agreement on, and allow for smooth transitions without lawsuits. And they entered into what was called the Broker Recruiting Protocol or just the Broker Protocol. Today, there are over 1,900 brokerage firms that are part of the Broker Protocol. In the last year, however, there have been some defections, and I’ll discuss that later.

Well, the Broker Protocol agreement resolved a lot of this litigation, so long as the brokerage recruiting firm and the departing broker dotted all their i’s and crossed all their t’s, and followed the agreement. They could switch firms without fear of being sued as long as they followed the agreement.

The essential terms of the agreement is that the departing broker is required, absolutely required, to submit a written resignation letter to the branch manager where he/she works. He/she has to hand it to them. You cannot just put it in the mail, or send it by email. The broker, at that point, in addition to the resignation letter, is required to hand over a list of the clients he/she intends to contact and solicit to take with him/her. On the list, you need to have the name of the client, the account title, and some clients have more account titles, not just their names. Again, you need to list all the account names and titles, account numbers, address of the client, phone number of the client, and the client’s email address.

The broker is allowed to take that list, but the only information that can’t leave the firm is the account numbers. So, all the information other than the account numbers can go with the broker to the new firm. Now, the broker cannot give that list to the recruiting brokerage firm until after he has delivered the written resignation letter and deliver the list that I just described. And the reason for that is that the departing brokerage firm does not want the recruiting brokerage firm to get a head-start in contacting the clients. And so, they made it that you cannot reveal that information until you officially resign, so everybody starts trying to take/keep the clients at the same time. Again, the brokerage firm, the departing brokerage firm, they put their brokers and their assistants on the phones and hopefully, they don’t say anything stupid and disparage the departing broker. The broker that left the firm can go without fear of any lawsuits being filed against the recruiting brokerage firm or him/her for soliciting clients.

In some cases, there’s another set of agreements to deal with in this process. And that is where the departing broker was at a firm where he’s a member of a team, a partnership, where there is generally a partnership agreement that might have additional restrictions that you have to be aware of. One thing that you should understand and feel sure of is that that agreement will not be construed to limit a broker from taking the customer information that I described.

Now, all of what I said is assuming that both the departing brokerage firm and the recruiting brokerage firm are still members of the Broker Protocol at the time of the departure. Because if either one of them are no longer members of the Broker Protocol, then, you can still be sued. So, you need to check that out and be sure on the day that you leave, that the firms are still members of the protocol. And there’s a way of doing that. If you contact my office, I’ll tell you how.

The other thing that you need to know is that some brokerage firms have never been part of the Broker Protocol. And those are the big wire-houses like Fidelity and Charles Schwab who get their business, not necessarily by recruiting brokers, but from advertising and the expenses that they incur in doing so.

Another thing that you need to know, which is most interesting, is that the firms that started the Broker Protocol, now Morgan Stanley and UBS have defected. They no longer are members of the Broker Protocol because they believe that the cost to them of being still part of the Broker Protocol is greater than the litigation costs that they will incur. They’ve suffered a lot of major defections to investment advisory firms. And so, they’re enforcing their covenants not to compete and/or their non-solicitation agreements against those brokers that are leaving.

But those suits are less today because generally, the new brokers, the brokers being recruited, the recruiting brokerage firms, all know how to avoid the non-competition agreements and not violate non-solicitation agreements. People, today, have relationships through social media. And if you’re really a good broker today, once you depart, your customers will know how to find you almost immediately by just going onto the internet.

One last thing I like to tell you is that the Broker Protocol may deal with departures of one or two brokers, but it won’t protect a recruiting brokerage firm from lawsuits for raiding a large number of brokers from the other firm.

This is a difficult area to understand and to analyze. You have to have up-to-date and up-to-minute information on who’s a member of the Broker Protocol. And so, if you have this problem, call our offices, we’ll answer your questions. And if you decide that you need assistance, we’re here for you.