Complying With The Broker Protocol When Changing Firms Or Going Independent

While advisors working at broker-dealers typically think of the clients they work with as “their” clients, the legal reality is that they are clients of the broker-dealer, not the broker themselves. As long as the broker continues to work at that broker-dealer, this may be a distinction without a difference. But as soon as a broker wishes to change broker-dealers or break away to an independent RIA, significant issues arise, from violating employment contracts by soliciting clients for a new firm while you still work for a new one, to rules protecting client privacy that prevent a moving broker from taking any client information with them.

In the early 2000s, litigation related to broker-dealer recruiting and changing broker-dealers had reached such a fever pitch, the major wirehouses Smith Barney, Merrill Lynch, and UBS executed a form of “cease fire” treaty, dubbed the “Protocol for Broker Recruiting”, and stipulating the terms under which a broker could depart a broker-dealer, and take (limited) client information, without spurring the litigation and temporary restraining orders that were common at the time.

Since 2004, the Broker Protocol has expanded from 3 founding firms to nearly 1,500, and is the essential roadmap for how a broker can leave their current broker-dealer in the cleanest and most efficient manner possible. The good news is that in the years since the Broker Protocol agreement was first signed, thousands of brokers have made successful transitions away from their original broker-dealer. However, the broker-dealers have still made it clear that any broker who does not fully and perfectly comply with the Broker Protocol may still be the subject of aggressive lawsuits seeking to limit their actions.

In this article, we look at the details of what the Broker Protocol is, what exactly brokers must do to comply with its terms and requirements, and the best practices and issues to consider when preparing for a transition away from a broker-dealer to another firm, or when going independent altogether.

Origins Of The Broker Protocol Agreement

The “Broker Protocol” is an agreement originally signed in August of 2004 between major wirehouses Smith Barney (now Morgan Stanley), Merrill Lynch, and UBS, regarding what client information registered representatives could take with them when changing broker-dealers.

The Broker Protocol came into existence as a form of “cease fire” between major broker-dealers, who routinely ended out in litigation with other broker-dealers whenever a broker changed firms. Prior to the Broker Protocol, it was common for brokers to announce their departure in the final minutes of a Friday afternoon, and then spend the weekend racing to contact and convert as many clients as possible to their new firm. At the same time, lawyers from the prior broker-dealer would try to find a weekend judge with whom they could file for a Temporary Restraining Order (TRO) against the departing broker to stop him/her from soliciting clients, followed the subsequent Monday by a more substantive injunction to further inhibit the broker from transitioning to a new firm. And after that, the broker-dealer would likely start litigation against the departing broker for a deemed breach of their employment contract (violating non-solicit or non-compete terms).

In 2003, the matter was further complicated by the SEC’s implementation of Regulation S-P, which places substantial obligations on financial services firms (including broker-dealers) to protect the privacy of client information. In the context of broker-dealers switching firms, this greatly amplified the stakes, because a broker who changed firms and took client information along was not only potentially breaching an employment contract with the prior broker-dealer, but causing a privacy breach under Reg S-P as well (which introduced the potential of FINRA sanctions against all involved parties).

Given the growing volume of litigation against departing brokers, combined with the higher stakes when Reg S-P was implemented, the major wirehouses established the Broker Protocol to provide a clear process for how a registered representative could change to another firm, without being deemed in violation of any firm’s non-solicitation clause in their employment agreement, and in a manner that would not violate Reg S-P.

In essence, the firms decided that it was better to make it easier for their brokers to leave, in exchange for the potential that those firms could also increase the number of brokers they recruited in, while reducing the collective number of lawsuits that all the firms were involved with. (Notably, there were also questions at the time of whether broker-dealers being toorestrictive about brokers changing firms, in a manner that could unfairly bind clients to the firm and cause consumer harm; the implementation of the Broker Protocol reduced this regulatory risk for the firms involved.)

Ironically, nearly 12 years later, the tide has shifted significantly on the Broker Protocol. What started originally as a means to facilitate intra-wirehouse recruiting (and occasionally a transition to an independent broker-dealer) may have unwittingly helped open the door to the rapid growth of the independent broker-dealers and the independent RIA. Particularly as the “breakaway broker” trend accelerated after the financial crisis. As a result, concerns have now begun to arise that large broker-dealers are chipping away at the protections of the Broker Protocol, from firms like JP Morgan accused of using the Protocol to recruit brokers in but trying to inhibit brokers from using the Protocol when leaving, to Merrill Lynch putting more pressure on not allowing the Protocol to protect brokers who try to leave and take clients that were internally referred from Bank of America’s retail branches, to Charles Schwab not allowing its own retail brokers to be eligible for the Broker Protocol when departing the firm.

Nonetheless, while the Broker Protocol started out as a ‘closed system’ Protocol for Broker Recruiting amongst broker-dealers and has now led to some “leakage” out of the broker-dealer system altogether, it’s not clear that there’s any way to close the doors at this point. Limiting the Protocol would shatter the ability of broker-dealers to recruit in today’s environment (even as they struggle with being recruited against). And the onset of the Broker Protocol was rumored to occur in part because there were concerns amongst regulators about the fairness to both brokers and consumers of binding brokers too closely to a particular firm. Furthermore, at this point narrowing the Broker Protocol (e.g., to only be allowed for changes between broker-dealers) may not survive antitrust scrutiny. For better or worse for the broker-dealers that initiated it, the Broker Protocol (or something substantively similar) appears likely to stay for the foreseeable future.

(Limited) Client Information Permitted Under The Protocol For Broker Recruiting

The essence of the Broker Protocol is that a departing broker may take with them a limited amount of specific client information, and that doing so will not be deemed a violation of Reg S-P, nor a violation of the non-solicit section of their employment agreement.

Specifically, the Broker Protocol permits the registered representative to bring along the following five pieces of client information:

– Names

– Addresses

– Phone Numbers

– Email Addresses

– Account Titles Of Clients They Serviced At The [Former] Firm

Notably, while the moving broker can take this information along when leaving, only this exact information may be taken. Additional information, from copies of account statements and account numbers, to any portion of client files, or other client data, is beyond the scope of the Broker Protocol agreement (eliminating the protections for the moving broker and potentially opening him/her up to Reg S-P violations, breach of employment contract, or other litigation).

In fact, to fully substantiate that the departing broker took only the correct client information, he/she should actually provide a full list of the exact client information being taken when submitting a letter of resignation to the [now-prior] firm. Furthermore, the Broker Protocol requires that the registered representative provide a list to the departing firm of all account numbers associated with those client accounts, so the firm can affirm which accounts are protected by the agreement.

Notably, the requirement to provide a list of client accounts to the departing firm also provides a list of specific clients and related accounts that the firm may solicit to get the clients to stay, which is not necessarily advantageous to the departing broker. Nonetheless, it is a requirement under the broker recruitment protocol to provide this list of account numbers to the departing firm, and that the broker not take those account numbers along to his/her new firm (as account numbers themselves are not protected under the Broker Protocol, only the names, contact information, and account titles).

After switching firms, the Broker Protocol permits the broker to use the transferred client contact information to request clients sign an authorization to release account-specific information to the broker at the new firm, in order to facilitate the subsequent transfer of accounts – if the clients decide that they wish to transfer their accounts, of course!

Verifying Or Adding Your Firm To The Broker Protocol Member List

A key requirement of the Broker Protocol is that in order for the broker to be permitted to take the specified client information, both the broker-dealer he/she is leaving and the new firm must be on the Broker Protocol List.

Fortunately, a website aptly named TheBrokerProtocol.com (maintained by the law firm Carlile, Patchen, & Murphy) maintains a Broker Protocol Directory of all firms that have signed the Broker Protocol Agreement. The list is updated regularly, and as of this writing, includes a whopping 1,446 firms (up from the founding 3 firms just 12 years ago!).

There is no fee for firms to join the Broker Protocol member list; firms simply have to submit a simple Joinder Agreement to become part of the Protocol for Broker Recruiting, which is handled by the law firm Bressler, Amery, & Ross (after SIFMA transitioned administration of the list in May of 2015). Notably, firms can also leave the Broker Protocol at any time, and withdrawals are also handled by Bressler, Amery, & Ross.

Notably, while early on the Broker Protocol list was essentially a Broker-Dealer list (as the Broker Protocol by its very name is focused on brokers at broker-dealers, and was originated amongst the wirehouses). However, in today’s environment, the list of Broker Protocol members includes a number of independent RIAs and other wealth management firms as well. The reason is that, as noted earlier, in order for the Broker Protocol to apply for a moving broker, both the departing and receiving firms must have signed the Broker Protocol agreement.

In fact, given this dynamic, “breakaway brokers” who are leaving their broker-dealer to go entirely independent and form their own RIA should have their new RIA entity join the Broker Protocol before they leave their existing firm. Of course, the timing of doing this is sensitive, as new firms that get added to the Broker Protocol list are circulated as part of the ongoing updates to the existing member firms, which means adding a new firm “too early” can tip off the departing broker-dealer. On the other hand, it’s crucial that the new firm by added by the time the moving broker actually hands in his/her resignation letter, or it won’t be permissible to actually take their 5 items of client information on that day of departure! And if you’re joining a hybrid RIA and broker-dealer arrangement, be certain that both the new RIA and the new broker-dealer are Broker Protocol members.

On the other hand, while a departing broker can add his/her firm to the Broker Protocol list, there is no way to force an existing broker dealer to join the list if they haven’t already. While the explosive growth of the Broker Protocol member list signifies that most firms have decided it’s an appealing trade-off as a broker recruitment protocol – the opportunity to recruit brokers without fear of litigation, in exchange for the risk that brokers will be recruited away – the firms that aren’t necessarily looking to recruit heavily in the first place may not join the list. Which means a broker at such a firm is ‘stuck’ with the terms of the firm’s existing employment agreement, including non-solicit and non-compete clauses (to the extent they are otherwise enforceable under state law), and has no path to use the Broker Protocol.

(Note: You can check the Broker Protocol member list to see if your firm is on the list, but it’s recommended not to do so from your company computers where your browsing activity can be tracked. In addition, it is not advisable to ask your firm directly if they’re a member of the Broker Protocol, as it can tip off the firm that you’re considering whether to leave, which may lead the firm to take preemptive action!)

Best Practices In Complying With The Broker Protocol

While the Broker Protocol does provide a clear pathway for a registered representative to change broker-dealers, or break away entirely to become an independent RIA, and still take (a limited amount of) client information, it’s crucial to fully comply with all the requirements of the Protocol. Failing to comply with even one key step can invalidate its protections altogether, and the courts have been especially unfavorable to brokers who did not act in good faith and even try to comply with the Protocol.

DON’T TELL ANYONE YOU PLAN TO LEAVE

The first key issue to consider when complying with the Broker Protocol is don’t tell anyone you’re planning to leave until the day comes. 

Telling your colleagues may lead to one of them accidentally (or even deliberately?) leaking the information to your firm, which could lead them to take preemptive action (which in the extreme could include terminating you before you have an opportunity to complete an orderly departure).

In addition, it’s especially important not to incite your colleagues to leave and come with you, as doing so may be construed as “raiding” – where a recruiting firm takes a large volume of advisors and staff members all at once, which goes beyond just “recruiting a broker” and transcends into damaging the prior firm itself. Although the exact definition of raiding is somewhat fuzzy, and should be a non-issue when a single broker departs, a departing manager/leader who recruits away multiple advisors (or in the extreme, an entire branch or a critical mass of the entirety of a small broker-dealer’s advisors) may constitute raiding and is not protected by the Broker Protocol. To be safe, some attorneys even advise not even to tell your employees (including your sales assistant) until the transition occurs, and then making an offer to him/her to join you at the new firm after the fact, to avoid any risk that your departure will be deemed “raiding” the prior firm’s employees.

It’s especially important not to announce in advance to clients that you plan to leave and solicit them to come with you. The reason is that, despite what you may think as an advisor, technically and legally the client relationship is with the firm, not with you. Which means soliciting to consider moving to your firm new, before you’ve left your existing firm, is a breach of your employment agreement with your current firm and can lead to (immediate) termination.

Only contact your clients to ask them to come with you to your new firm after you have submitted your resignation to the existing firm.

And bear in mind that even telling family members before the move can lead to having the information unwittingly leaked early (e.g., the family member who calls the office and asks “I’m trying to reach John. Does he still work there?”).

The bottom line: be very, very cautious regarding who you ever disclose your prospective departure to before you actually submit your resignation.

THE BROKER PROTOCOL RESIGNATION PROCESS

When the time comes to make the transition, a crucial step in the process is executing a clean and proper process of resigning from the current broker-dealer.

The act of resignation should be done in writing, generally delivered to the local branch manager in person. The resignation letter itself can be relatively short and simply state the decision to resign and the immediate effective date (the longer the letter, the more you may unwittingly say something that opens the door to future legal troubles).

Per the requirements of the Broker Protocol, the resignation letter should also include a copy of the exact client information/documentation that you are taking with you (which should be only the 5 specified client information details permitted under the Protocol and nothing else). This helps to substantiate that you did in fact take exactly and only the permitted information.

In addition, along with your resignation letter, you must include a list of all the account numbers associated with your client accounts. This list of account numbers should not be taken with you beyond the resignation, it is solely to be provided to the broker-dealer to notify them of the related clients and accounts to which the Protocol applies.

Upon submitting the resignation and exiting the building, do not take any other information with you. Be certain to return everything else that is business related back to the firm. Give back any company computer, return flash drives, leave behind client files and statements. Do not make duplicate electronic copies of this information, either saved or emailed to yourself. Taking any of this information with you when you leave can be a violation of client data privacy, subject to potential SEC and FINRA fines and regulatory discipline, in addition to breaching the Broker Protocol itself and rendering its protections invalid, and opening the broker up to litigation from the departing broker-dealer (along with a potential Temporary Restraining Order to further halt the transition and solicitation of now-former clients).

SOLICITING (PRIOR) CLIENTS AFTER YOU HAVE RESIGNED FROM YOUR (PRIOR) BROKER-DEALER

Once your resignation has been submitted, it’s time to (finally) solicit your (now-prior) clients to join you at the new firm. However, you still may not actually solicit clients until you are formally employed at your new firm. In practice, many/most recruiting transitions (or breakaways) are deliberately coordinated to make the new firm’s registration live the same (Fri)day that the resignation occurs to allow for an immediate switchover. But this must be planned in advance for proper execution.

When soliciting clients to come over, it’s also crucial to recognize that only the actual departing advisor who resigned under the Protocol for Broker Recruiting has the right to solicit those clients. Other employees or advisor colleagues at the new firm do not have the right to contact and solicit those clients. All points of contact must initially come directly from the moving broker, until clients have agreed to make a transition (and then supporting staff may be involved).

In addition, departing brokers should be cautious when soliciting clients not to disparage the prior firm, or risk opening themselves up to litigation for libel or slander. The discussion with those clients should focus instead on the virtues of the new firm, or the benefits of going independent, or whatever other benefits there are for working with the new firm.

Also, remember that upon your departure, the prior firm can and almost certainly will immediately begin to contact your (former) clients and solicit them to stay. While the Broker Protocol does permit the departing broker to take specified client information in order to solicit the clients to make a change, it does nothing to limit the prior firm from also contacting those clients and asking them to work with a new broker at the existing firm. And of course, the unavoidable reality is that the firm will know exactly which clients those are, as the list must be provided along with the broker’s resignation letter.

WHICH CLIENTS ARE SUBJECT TO THE PROTOCOL FOR BROKER RECRUITING?

While the Broker Protocol does allow moving brokers to take specified client information with them and solicit those clients, it’s worth recognizing that there is occasionally some debate about which clients are subject to the rules.

In general, clients that the registered representative developed and brought to the firm in the first place are recognized as being protected under the Protocol. But clients that weren’t actually brought in by the broker themselves are often subject to more scrutiny.

For instance, when the broker is part of a team – an increasingly popular structure at wirehouses – the situation is more complicated, as many brokers are often involved at once in supporting the combined client base. Accordingly, there may be a team agreement that stipulates additional rules are “whose clients are whose” in the event that one member of the team chooses to depart, and some team agreements are very restrictive if/when an advisor wants to break away from the team. In the absence of any specifications in the team agreement, the Broker Protocol itself states that by default, once a broker participates in a team in a producing capacity for 4-or-more years, all the clients of the team are fair game. If the broker had been participating in the team (in a producing capacity) for less than 4 years, the Broker Protocol only protects information for clients that particular broker brought in to the team.

Another complicating situation is where the firm itself was the one that introduced the clients to the broker – for instance, an internal referral program from another division of the firm (e.g., referring retiring clients from the 401(k) division to the broker for an IRA rollover), or an arrangement where the broker is paid to service the clients of another broker who retired. In those situations, additional agreements between the broker and the firm may apply, dictating the terms of those internal referrals, and potentially limiting those clients from being eligible for Broker Protocol treatment.

Preparing For The Breakaway Or Broker-Dealer Transition

Beyond the process of complying with the Broker Protocol itself, the reality is that there’s far more involved in executing a clean transition away from a broker-dealer, whether it’s to be recruited to a new broker-dealer, or breaking away to form (or join) an independent RIA.

Perhaps the biggest issue is simply the sheer business disruption involved, in going through everything from learning new software and systems, to the race to solicit and transition (former) clients, to the massive income gap that can occur while waiting for clients to get up and running (and be billed) at the new firm. Even in the best of circumstances, income can dip precipitously for several months while clients are being solicited and client assets are transitioning, which means the advisor’s new practice needs to be certain to have enough working capital to manage business expenses (and employee salaries) until revenue picks back up again. (Fortunately, there are lenders now available to help finance the working capital for those transitions.)

In addition, it’s important to remember that while following the Protocol for Broker Recruiting does reduce the moving broker’s exposure to liability for taking (limited) client information and soliciting those former clients, it does nothing to change the terms of any prior retention deals at the prior firm, including any forgivable loan terms. The latter is especially crucial to consider, as just walking away from a retention deal means income that won’t come in, but a forgivable loan means dollars will be due to the prior broker-dealer when walking away. (Fortunately, again, lenders are available that will help finance the repayment of a forgivable loan, at least turning the obligation into a more manageable ongoing payment instead of a lump sum commitment.)

It’s also helpful to recognize that when the time comes for a transition, some client assets/accounts are easier to transition than others. While the terms of the Broker Protocol require the broker-dealer to allow the moving broker to take certain client information, and cooperate with subsequent ACAT transfer requests, proprietary funds that can only be held on the prior broker-dealer’s platform are still proprietary and don’t have to be transferred. Similarly, not all third-party managers are available on all platforms and may not be transferrable either. Thus, while ultimately it’s still important to invest in solutions that are right for the client first, some solutions are more easily transitioned to a new broker-dealer than others, which is a consideration when evaluating which products to put client investment dollars into in the first place.

Perhaps the most important step of all, though, is simply to review the existing employment agreement with the broker-dealer – that document covering everything from compensation and retention bonuses, to the crucial non-compete and non-solicit terms. Although the whole point of the Broker Protocol is that it effectively overrides the existing employment agreement’s non-solicit terms, that’s only true specifically for the non-solicit terms (and generally only for clients that the broker brought in/developed themselves). The rest of the employment agreement still applies, and must still be complied with.

And the consequences are substantial. Not only does failure to comply with the Broker Protocol open up the departing broker to potential litigation (including a Temporary Restraining Order to prevent the solicitation of clients), but it can also embroil the new firm in litigation (which they will certainly not appreciate), and may so slow or damage the transition process that few clients come to the new firm. This, in turn, may lead the departing broker to fail to qualify the terms of his/her recruitment with the new firm, leading the deal to fall through altogether, and leaving the broker with a potentially blemished U-4 and BrokerCheck record (if the departing firm reports the inappropriate departure and client privacy breaches on the U-5 termination form). And if the broker failed to act in good faith in at least trying to comply with the Broker Protocol, the courts may take a heavy hand as well.

In other words, while the Protocol for Broker Recruiting provides a path of safety, stepping off the path can still have dire consequences for the broker’s business. As a result, it is highly advisable to engage a competent attorney to support the transition, and ensure that every requirement of the Broker Protocol is handled properly.