Exploring the Broker Protocol

Litigation against departing brokers has dropped off a cliff since The Protocol for Broker Recruiting was created in 2004 as an agreement between Citigroup for its Smith Barney unit, Merrill Lynch, and UBS Financial Services Inc. The two-page document now has more than 400 signatories, including registered investment advisors who are actively recruiting.

But make no mistake: firms will sue advisors who don't properly use the protocol, and indeed there is still ample litigation over advisors who switch firms. As such, when you are planning to leave your firm, it's important to understand what the protocol is and what it isn't.

"There's a lot of mythology surrounding the protocol. Most reps couldn't tell you what it covers, who is bound by it and what it means. There's a vague sense that it's a get-out-of-jail free card, but very few people have looked into it or understand it," says Robert Ross, senior counsel at MarketCounsel in Englewood, N.J.

For starters, check to see whether the firm you are going to is a member of the broker protocol. If it's not, you may not be covered by the protocol's protections. While there is some legal precedent that would suggest your former firm may be held to the protocol, to be on the safe side, make sure you're not taking any confidential information with you and that you follow your agreements, Ross says.

One major issue that comes up with respect to the protocol is when a departing broker takes too much information or is perceived to have done so. According to the protocol, there are very limited types of information a broker is entitled to—namely: client name, address, phone number, e-mail address and account name.

If you take information you're not entitled to, like social security numbers and account numbers, it's easy for firms to figure out that this has happened and it increases the likelihood that you'll be sued, says Ernest Badway, co-chair of the Securities Industry Group at Fox Rothschild LLP in New York. While firms can't stop the transfer of your clients' assets, they can make an advisor's life difficult during and after the transition.

The proper handling of client data is also important to a hiring firm that is hoping to use the protections of the protocol. If the firm allows its new hires to bring prohibited data, that could be a legal problem for the hiring firm as well, says Patrick J. Burns, Jr., managing attorney with The Law Offices of Patrick J. Burns, Jr., P.C. in Beverly Hills, Calif.

Advisors and hiring firms also must be careful not to violate privacy regulations. Say, for example, that a broker resigns on Friday morning and, on Saturday morning, every client has received (by Federal Express) new account documentation with the pertinent information filled in. That could, in fact, be a violation of the privacy rules because the customer hasn't given the broker permission to release the information to the new firm, Badway explains. "There are certainly a lot of issues that arrive that could end up being problematic for people who move from firm to firm."

Another issue that tends to come up with respect to the protocol pertains to joint accounts. Some advisors assume that if they've worked on accounts as part of a team they are automatically entitled to certain data under the protocol, but that may or may not be the case, Burns says. Entitlement depends on many factors, including the team member agreement, if there is one.

Another important thing to remember when you are leaving your firm is to follow the resignation process set up by the protocol. An advisor must submit in writing his or her resignation to branch management, and simultaneously include a copy of the client information being taken. The protocol also requires reps to provide a list of client account numbers to the firm, though that information may not be taken outside the firm. Reps also need to make sure they don't pre-notify clients that they are leaving, says Burns. "It's a big mistake—a bad thing to do. You'll pretty much ruin the protections of the protocol that you thought you had."

Keep in mind that it's important to hire an attorney even if you think you're doing everything right. There are issues outside of the protocol that you may not know; these issues—such as privacy laws, business torts and other considerations—could come back to haunt you. "Although the protocol is an excellent recruiting tool, it's not the only thing that matters," says MarketCounsel's Ross.

Hiring firms also have a lot to think about when it comes to the protocol. It behooves firms that want to recruit to be part of the process because following the protocol decreases the likelihood that the joining advisor will be sued. "It has a lot of upside, but it doesn't have a lot of downside for independent firms to join," Burns says.

That said, firms need to make sure they are familiar with what kind of information can be accepted, and how much contact they can have with the joining rep. "Firms need legal counsel to guide them through the dos and don'ts, or they need a really savvy HR person who is familiar with these topics," Ross explains. "If you do things right as a receiving firm, you should be able to recruit reps from another firm with no interference."

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