Some brokers are eroding "The Protocol for Broker Recruiting," an agreement among firms that allows registered investment advisers to transfer between participating firms without lawsuits or arbitration.
In the past, the Protocol was used to ease the ability of the big firms to recruit. Now, however, it is also being used by advisers to break away on their own, and some Wall Street firms are taking steps to prevent that and weaken the Protocol in the process.
When the Protocol went into effect in 2004, it was essentially a "cease-fire," among three of the biggest wire houses, according to Patrick J. Burns Jr. a Beverly Hills, Calif., attorney and the author of the white paper "Opening the Floodgates to Independence: The Brief History and Impact of the Protocol for Broker Recruiting."
Since then, however, more advisers have been leaving for smaller, independent firms, and the number of companies belonging to the Protocol has risen dramatically, leading, in some cases, to new and creative interpretations of the rules, he said.
The most high-profile recent incident occurred at U.S. Trust, a unit of Bank of America Corp.
U.S. Trust is not a member of the Protocol, and it issued a memo stating that its employees are not protected by the agreement. It also broadened the number of employees covered by its so-called Garden Leave policy, which requires departing advisers to give 60 days' notice, during which they still receive base pay but are unable to contact their clients. At the time, U.S. Trust said that this was not a new policy, but merely the merging and expansion of some existing policies.
These types of Garden Leave provisions are commonly applied to high-level executives, Burns said, but not usually used for advisers, who would likely find that their clients had been reassigned to other advisers at their old firm long before they could be contacted.
However, some former U.S. Trust brokers have contended that because their securities licenses were through Merrill Lynch, also a unit of B of A and a Protocol member, they qualified for Protocol protection as well.
A court case involving Dynasty Financial Partners, a new registered investment adviser in New York, and two former U.S. Trust employees who joined Dynasty, was settled in January. The white paper said that many industry observers believe that U.S. Trust's memo about Garden Leave was in response to this case.
Burns said, however, this is not the only instance of firms playing a little loose with the Protocol agreement. He said he has seen a promissory note issued to new financial advisers by a Protocol member firm he declined to name that stated that departing advisers would not have any right to claim protocol protection until they had settled the note. This effectively cancels the Protocol for many advisers at that firm, he said.
Under the Protocol, departing advisers are able take certain basic client information, including names, addresses, phone numbers, email addresses and account titles without fear of reprisal from their old employer. They are not permitted to take Social Security numbers, account numbers or copies of any statements or financial documents.
Without Protocol protection an adviser could face lawsuits from their former employer if they contact clients, Burns said. A hiring firm may think it's getting a new employee with a list of clients just to discover that is not the case.
Part of the problem, Burns said, is the nature of the Protocol. "It's not regulated — it's just an agreement among the member firms," he said. And there is no process in place for amending the Protocol, or what to do to members that deviate from or violate it.
Joining the Protocol is easy. Firms just need to notify the Securities Industry and Financial Markets Association that they wish to be added to the Protocol and complete a joinder form. There is no cost to join and no known formal review process for members.
When the Protocol was first developed it was an agreement among just a few companies, Burns said, which made discussions about any issues likely easier.
Now there are 650 firms involved, including broker-dealers and independent firms as well as the big wire houses, so Burns said he believes there needs to be a system for enforcement.
Burns said that if the firms that are amending the Protocol "are not being called on the issue it will probably lead others to come up with their own unique interpretations."
And Burns said that is a mistake, because erosion of the Protocol may end up bringing back the era where firms were forced to spend a lot of time and money suing each other over recruiting practices, and advisers themselves could not move as easily between jobs without fear of reprisal.
