Broker Protocol — Legal Pitfalls for Brokers/Advisors Switching Firms Post-Protocol

Morgan Stanley, UBS and Citigroup recently left the Protocol for Broker Recruiting (“Protocol”), which established procedures allowing advisors to switch firms and bring their clients with them. The Protocol helped protect such advisors from legal liability to their old firm for soliciting clients and using certain client information, provided the Protocol was followed. It remains to be seen how many other major firms will follow suit. But for advisors employed by the above firms and planning to move, this significantly alters the playing field, making them legally vulnerable for taking steps to move their business that were protected under the Protocol. Advisors planning to move from firms still subject to the Protocol need to take into account that by the time they leave, their old firm may have withdrawn from the Protocol. In either event, careful planning and legal advice every step of the way is crucial.

Unlike a typical Protocol move, advisors at non-Protocol firms now have to budget for possible court litigation, in which their old firm would seek to obtain an order precluding them from soliciting clients and from using or removing client records or information. Generally speaking, under the Protocol advisors are allowed to take client lists containing certain limited information and to solicit clients once they move to their new firm. Without the Protocol, a major legal factor governing transitions will be the advisors’ employment agreements with their old firm, which often broadly restrict solicitation of clients and other firm employees, and the use or removal of client or firm confidential information. There is also legal precedent imposing liability under common law and state statutes for conduct constituting unfair competition and theft of trade secrets.

Such court litigation, while often of short duration, is expensive. It requires the parties to appear for an evidentiary hearing before a judge on a expedited schedule usually not much longer than a couple of months. This means the lawyers typically work almost around the clock to be prepared for the hearing. After resolution of the court proceeding, the dispute may continue in FINRA arbitration.

Advisors are wise to include on their transition team qualified and experienced lawyers, and seek their advice every step of the way, from the planning stage to the onboarding of clients at the new firm. This is crucial because there are major legal pitfalls that can be avoided by careful planning and execution. For example, it is important that the advisor not engage in any oral or written communications (by text, email or otherwise) with clients that could be construed as solicitation, either before or after the advisor moves, until the client initiates contact with the advisor at the new firm. It should be remembered that sending emails from a personal email address but using a firm computer makes them accessible to the firm. The new firm should be notified of and approve client communications. It is best practice to submit a written resignation to the old firm, vetted by lawyers, and to act professionally towards former colleagues during the exit, avoiding any discussion about the reasons for leaving, and particularly any inflammatory statements that might incentivize the old firm to go to court.

To facilitate client contact with the advisor at the new firm it is a good idea to compile client contact information from public sources, not old firm records, and send a plain vanilla move announcement, sometimes referred to as a tombstone. The announcement should contain the advisor’s contact information at the new firm, but not include any statements that could be construed as soliciting or encouraging clients to move, or touting the expertise of the new firm. It is advisable that the announcement be published widely to all interested parties. Of course, once an advisor starts at a new firm, the advisor can
update his or her employment status on social media accounts such as Linked In, Facebook, Twitter and Instagram.

The above is a sample of some of the legal issues that can arise in post or non-Protocol moves. However, with proper planning and legal counsel, advisors can minimize the chance their move will precipitate unwanted litigation.