“What’s all this noise about the Protocol for Broker Recruiting?” I asked my partner and protocol expert Brian Carlis. He advised me that effective Dec. 1, 2017, UBS joined Morgan Stanley in withdrawing from the protocol. Morgan Stanley’s withdrawal was effective late October.

The move sparked widespread speculation that other wirehouses, Merrill Lynch and Wells Fargo, would soon withdraw, effectively ending the protocol agreement. On Dec. 4, 2017, though, Merrill Lynch announced that it would remain in the protocol. Although Wells Fargo has not yet officially made its intentions known, recent news reports appear to indicate that it will stay in the protocol, too. Citigroup, however, has announced that it joined Morgan Stanley and left.

It also is believed that the withdrawing firms viewed the protocol as unfair, insofar as the quest for independence is concerned. Reps departing to form their own independent registered investment advisor use the protocol to depart, but are then free from the fear that the protocol could be used against them.

Morgan Stanley recently obtained a temporary restraining order in a federal court in New Jersey against a departing broker. The broker was going independent and had formed his own RIA. It will be interesting to see if Morgan goes after reps who leave for traditional wirehouses, in addition to those going independent. In other words, will an “unofficial protocol” develop?

History

The protocol was established in 2004. The original signatories to the agreement were Morgan Stanley (Citigroup/Smith Barney), Merrill Lynch and UBS. Since that time, more than 1,600 broker-dealers and registered investment advisory firms have signed on to it.

The protocol lets representatives of member firms take a limited amount of client information when leaving one protocol member firm for another. Strict compliance with the terms of the protocol also relieves the departing representative from certain (sometimes all) non-solicitation provisions in their employment agreements.

Establishment of the protocol essentially opened the floodgates for representatives to move from firm to firm. Often, these moves were driven by large signing bonuses. A proper protocol transition effectively eliminates lawsuits and restraining orders that often harm clients, as well as representatives.

Latest Developments

It has been reported that Morgan Stanley and UBS left the protocol to focus on more of an organic growth business model, which is unclear. What is clear, however, is that the movement towards independence has sapped the major wirehouses of billions of dollars in assets under management.

Over the years, many Stark & Stark clients have moved from major wirehouses to their own independent RIA firms. We have counseled our clients to join the protocol to ease the transition.

By joining the protocol, the newly established RIA can take certain client information and be free from litigation or arbitration pursuant to a non-solicitation provision in an employment agreement. In our estimation, most protocol-member firms fit this description.

Whether the withdrawals by Morgan Stanley, UBS, and Citigroup prompts additional protocol member firms to withdraw remains to be seen. Clearly, Merrill Lynch’s announcement that it has no current intention of leaving the protocol will thwart the withdrawal movement.

The Morgan Stanley, UBS, and Citigroup withdrawals raise many questions, legal and practical. By way of example, we believe it will be difficult for a former protocol member firm to argue that certain client information could be taken by a departing representative in an earlier month (pre-withdrawal), but this month (post-withdrawal) that same information constitutes confidential, proprietary and trade secret information.

We expect this and other important questions to be answered in the coming months. For now, the protocol remains a viable recruiting tool as well as a navigator of the road to independence.