In this column I will address a specific issue that has increasingly become the subject of much discussion in the investment advisory industry: the “Protocol.” What is this “Protocol?” Why is it germane to investment advisors? The simple answer is that it is not unless you are an existing investment advisor seeking to hire a wirehouse broker, or a wirehouse broker seeking to leave his or her broker/dealer to start your own advisory firm.
The Protocol for Broker Recruiting originated in 2004 between Citigroup for its Smith Barney unit, Merrill Lynch, and UBS Financial Services, Inc. The principal goal of the protocol was to further clients’ privacy and freedom of choice as advisors move between firms. If a departing advisor follows the protocol, neither the advisor nor the new firm has any monetary or other liability. However, the protocol does not bar the prior firm from bringing a claim for raiding. The protocol is to be implemented and adhered to in good faith.
The protocol has become increasingly popular. The majority of the protocol member firms joined the protocol in the past few months as of this writing in early January 2009. Most new protocol member firms appear to be registered investment advisory entities, as opposed to broker/dealers.
If you are an RIA firm, should you join the protocol for broker recruiting? If I am an individual advisor, what might happen to me if I leave a protocol member firm for a firm that is not a member of the protocol? What can I do as a member of the protocol? What can’t I do as a member of the protocol?
To assist me with the answers to these issues, I have called upon the expertise of my partner, Brian Carlis, who, along with my other colleagues at Stark & Stark have successfully addressed transition-related issues for many years.
I intend to leave my current employer to go to a firm that is not a member of the protocol. If my current employer chooses to go after me, what can I expect?
Typically an employer sends a cease-and-desist letter reminding the broker/advisor of obligations set forth in any nonsolicit agreement and admonishing the advisor to adhere to the agreement or face possible legal consequences. If the company chooses to “go after” the broker/advisor, the advisor can expect the employer to seek a temporary restraining order in either a federal or state court. This restraining order routinely is granted to maintain status quo and prohibits an employee from soliciting accounts pending an injunction. Even if an injunction is granted, the court won’t stop the filing of Automated Customer Account Transfer (ACAT) forms. However, the court will stop the solicitation of accounts. Normally, within 10 days after a temporary restraining order is issued, the court either schedules a date for a preliminary injunction hearing or transfers the matter to FINRA for a Rule 13804 hearing. Such a hearing is typically held within two weeks of the issuance of a temporary restraining order. The Rule 13804 hearing is held to determine if the injunction should continue, be vacated, or modified. After the Rule 13804 hearing decision, the FINRA panel schedules the case for a damages hearing, if necessary. During this process, the overwhelming majority of cases settle.
I am leaving a protocol member firm to start up my own, independent investment advisory business, should I join the protocol?
By joining the protocol, neither you nor your new firm will have any monetary or other liability to the former firm. Provided that the terms and conditions of the broker protocol are strictly adhered to, you will be able to solicit and transfer your accounts to your new investment advisory firm.
How much does it cost to join the broker protocol?
There is no cost to join the broker protocol and there is no annual or other fee imposed to continue as a member.
What if I join the broker protocol and later no longer wish to be a member?
A member of the broker protocol may withdraw at any time. Ten days prior written notice of withdraw is requested, but not required. To date, only one member of the broker protocol has withdrawn.
As a protocol member, am I permitted to take notes or files from my current clients to my new employer?
The law is fairly clear that a departing advisor should not bring any customer information to a new employer. Typically, customer information is considered confidential and proprietary to the employer. Therefore, a departing advisor copying information about clients will be subject to the return of that information and may provoke litigation. Additionally, the departing advisor may need to purge computers and sign an affidavit stating he isn’t taking confidential or proprietary information.
What liability can I have under the broker protocol?
When followed appropriately, the protocol acts as a waiver against liability for a financial or investment advisor who leaves the employment of one firm and solicits former customers to transfer their brokerage accounts to the new firm–assuming the new employer also is a member of the protocol. The exception to this general provision applies to claims of “raiding” between protocol firms. Raiding claims are not waived by the protocol.
What can I do under the broker protocol?
You can take the following information regarding the accounts you serviced at your “old” firm:
o Client name
o Client address
o Client phone number