JPMorgan Chase & Co. is of two minds about poaching brokers: It can hire whomever it wants from competitors, but many of its own brokers are off-limits.
It’s a position that is testing the boundaries of the so-called Protocol for Broker Recruiting, a decade-old agreement among hundreds of brokerages that’s meant to minimize litigation when advisers defect. JPMorgan and a dozen or so other members of the pact are increasingly claiming exceptions to its rules, and they’ve filed suit to stop some brokers from leaving and taking clients with them.
JPMorgan’s effort to benefit from the agreement while also declaring some of its own employees untouchable is raising hackles inside the industry. It’s also prompting some insiders to suggest that the rules should be rewritten.
JPMorgan’s critics say the bank is gaming the system, and at least a few judges have shown sympathy for that view.
“You’re trying to do carve-outs here,” Justice Jeffrey Oing of the New York State Supreme Court said during a hearing in May 2015 in which he rejected a temporary restraining order sought by JPMorgan to prevent three departing advisers from contacting their former clients. “You either sign it or you don’t,” the judge said, referring to the industry pact.
Just this month Oing’s fellow justice, Geoffrey Wright, ruled in favor of JPMorgan in a separate but similar case, reflecting the uncertain legal ground surrounding the disputes.
To read about a case in which JPMorgan accused a former employee of trying steal clients, click here.
JPMorgan declined to comment through a spokesman, Robert Carosella. In legal arguments it has said that advisers working in its private banking division were “highly compensated salaried employees” who oversaw “house accounts” for wealthy clients and therefore weren’t covered by the protocol, which JPMorgan interprets as applying only to commissioned advisers.
Drafted in 2004 by Merrill Lynch, Citigroup Inc. and UBS Group AG, the three-page “cease-fire” protocol commits members to swear off suing over registered representatives who leave, as long as the reps take only five pieces of client data with them: names, addresses, phone numbers, e-mail addresses and account titles.
Since then, about 1,400 brokerages have signed on. They include big firms like Morgan Stanley and Oppenheimer & Co., as well as hundreds of smaller ones.
Some brokerages, like discount firm Charles Schwab Corp., have steered clear of the protocol altogether and in some cases resorted to old-school legal hardball with defecting advisers.
A Schwab spokesman, Michael Cianfrocca, said his company has “a different business model than many of the Wall Street firms, and the broker protocol does not make sense for our model.”
In and Out
More than a dozen protocol members have claimed to be partly in the protocol and partly out. One of them is founding member Merrill Lynch, now owned by Bank of America Corp.
Merrill Lynch chipped away at the industry pact several years ago when it started distinguishing between two types of its registered reps: those who built books of business on their own, and those who did so from in-house referrals. The brokers who drum up their own business fall under the protocol, while those who rely on company leads don’t, said Bank of America spokesman Matt Card. The company gives brokers a choice between the two classifications, he said.
No legal or regulatory body governs the protocol, whose membership was originally cataloged and published by the Securities Industry and Financial Markets Association, an industry body, before being handed off to a private law firm.