In And Out
More than a dozen protocol members have claimed to be partly in the protocol and partly out. One of them is founding member Merrill Lynch, now owned by Bank of America Corp.
Merrill Lynch chipped away at the industry pact several years ago when it started distinguishing between two types of its registered reps: those who built books of business on their own, and those who did so from in-house referrals. The brokers who drum up their own business fall under the protocol, while those who rely on company leads don’t, said Bank of America spokesman Matt Card. The company gives brokers a choice between the two classifications, he said.
No legal or regulatory body governs the protocol, whose membership was originally cataloged and published by the Securities Industry and Financial Markets Association, an industry body, before being handed off to a private law firm.
Courts have tended to recognize the agreement as a de facto industry standard. But the suits can quickly get complicated when a company claims to be a conditional or partial member.
Side Letter
JPMorgan joined the group two years ago, giving it the right to recruit from other member firms. In a side letter filed with Sifma, however, it stated that it considered its private bank off-limits to others.
JPMorgan has asserted in court that roughly 450 registered reps at the J.P. Morgan Securities brokerage -- a legacy of Bear Stearns, which JPMorgan acquired -- are covered by the protocol because they’re traditional commission-based brokers. “You’re basically given a desk and a phone and you’re told, ‘Go out and find some clients,’ ” is how an attorney for JPMorgan explained their roles in an Illinois federal court.
By contrast, the hundreds of reps in JPMorgan’s private bank, who manage investments for wealthy clients, aren’t covered by the agreement, the side letter stated. Although also registered with J.P. Morgan Securities, they’re paid a salary and bonus to service house clients, the bank says. The claim has been disputed in court.
“JPMorgan has the ability to use the protocol as a shield,” says Jonathan Pollard, a Florida attorney who specializes in non-compete employment agreements. Pollard, who is a critic of JPMorgan’s interpretation of the protocol but hasn’t litigated against the bank over it, said: “It can invoke the protocol when it takes people from other firms and then say house clients are off limits when someone leaves.”
How much authority JPMorgan’s “limited joinder” carries has been disputed repeatedly since it joined the protocol. It typically begins with the bank asking a judge to issue a temporary restraining order that forbids a departing rep from contacting her former clients. Whatever the ruling, such cases eventually end up in front of Financial Industry Regulatory Authority arbitrators and are routinely settled for undisclosed terms.