Is The Broker Protocol Being Eroded?
In 2004, three wirehouse firms forged a "good faith" pact among themselves to put a kibosh on the lawsuits and temporary restraining orders hurled against each other whenever one of their registered reps jumped ship to join a rival firm.
That pact, known as the "Protocol for Broker Recruiting," was a deal between Citigroup's Smith Barney unit, Merrill Lynch and UBS Financial Services. Its purpose was to enable reps to change firms and take basic client information--name, address, phone number, e-mail address and account title--with them without fear of retaliation. The protocol, which contains other guidelines, now has more than 650 signatories ranging from broker-dealers and banks to investment managers and financial advisory firms.
But recent events have raised doubts about the protocol's basic protections, says Patrick Burns, a Beverly Hills, Calif.-based securities industry attorney. In a white paper he wrote on the topic and in a separate interview, Burns specifically points to two cases involving Bank of America and its Merrill Lynch division.
The first involves last year's well-publicized legal tussle between Bank of America and four former employees of its U.S. Trust unit who bolted to Dynasty Financial Partners, a wealth manager and provider of investment and technology platforms for independent financial advisors. The bank claimed the group improperly took client records with them when they left. The former employees said they were registered to Merrill Lynch, a protocol member. But prior to this incident, Bank of America, which isn't a protocol member, circulated a letter among protocol firms saying it didn't consider private wealth managers at its Merrill Lynch and U.S. Trust divisions to be covered by the protocol. The lawsuit was settled in January, but terms weren't disclosed.
Burns says Bank of America's efforts to weaken protocol protection for its Merrill employees are troubling. "There's nothing in the protocol that mentions steps to take if you want a carve-out, or even if you're able to do that at all," Burns says.
After the lawsuit settlement, Bank of America instituted a so-called "Garden Leave" policy on U.S. Trust employees requiring them to give 60 days' notice before they leave the company, versus the prior two-week notice. They're also prohibited from soliciting clients for eight months, according to reports. The belief is that this policy is meant to prevent another multi-billion-dollar defection by top producers.
Burns says many U.S. Trust advisors maintain their securities license through Merrill Lynch, but as with the Dynasty-related case, Bank of America says the protocol doesn't apply to them.
Burns says he doesn't foresee a lot of copycat activity by other protocol signatories. He notes that one of the protocol's unforeseen consequences was enabling registered reps to leave the wirehouse channel and join the independent advisory space. The wirehouses would love to stanch the flow, and Burns says the idea has been floated to create a new protocol just for the wirehouses. But he doesn't believe those efforts will fly. "I don't think they can legally do that in light of antitrust laws," he says. "You can't prohibit others from achieving a level playing field through open and fair competition."
Burns also says wirehouse attempts to clamp down on the protocol would hamper their recruiting efforts with other wirehouse reps. "It would be an admission that they basically have to slam the door shut to keep people from leaving," he says.