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How the Broker Protocol Impacts Your Firm's Business Strategy

How the Broker Protocol Impacts Your Firm's Business Strategy

By Scott C Matasar, Esq

The creation of the Protocol for Broker Recruiting (the "Protocol") was a watershed moment in the handling of employment transitions in the securities industry.  Registered reps no longer had to go through the frenzied Friday afternoon resignation fire drills, and securities lawyers like me no longer had to run to court early on Monday morning either to help the firm that lost their FA handcuff the resigning broker, or to help the FA's new firm convince a judge to give their new advisor emancipation.  Since the Protocol was created, things have especially changed from the rep's standpoint; financial advisors are able to move their practice from one firm to another much more easily, confident most of their clients can move with them without deterrence or road blocks.

While the Protocol was initially formed by a handful of the big wire houses, it has taken on a life of its own and gone far beyond what its founders expected or intended.  From its modest beginnings, as of the date of this posting 686 broker/dealers, investment advisers, wealth management firms and investment banks ranging from the global firms to the smallest local boutiques have signed on.  Numerous commentators are discussing, given the proliferation of Protocol signatories across the country, whether the Protocol's procedures for FA transitions is now the de facto industry standard--or will become the standard soon.

Given this environment, if your firm is not a Protocol Member, now is the time to consider whether your  business model and strategy makes sense for you to join.  For those not familiar with the Protocol, it is a "treaty" among financial institutions governing the process by which reps move from one signatory firm to another.  Only firms can be Protocol members, not individuals.  There is no limit on how small a signatory can be--so, if you are in a small practice made up of only several independent contractor registered representatives working under a common LLC, that LLC is eligible to join the Protocol. 

How does the Protocol work?  When a registered representative at a Protocol Member firm tenders their resignation, if they are joining another Protocol Member firm, they are entitled to take with them a list containing the following limited types of information:

  • Client names
  • Client addresses
  • Client phone numbers
  • Client email addresses
  • Title of their clients' accounts (e.g., whether JTTEN, FBO, etc.)

What can't they take with them?

  • Copies of account statements
  • New account documentation or other materials about clients' investing profiles
  • Account numbers or other identifying information
  • Other proprietary, confidential firm information

Under the Protocol, the departing rep is entitled to use the information they take for the limited purpose of soliciting their clients to move to their new firm.  If the clients then submit requests to transfer their accounts (typically through ACAT), the FA's prior firm has an obligation under FINRA rules to process the transfers in a timely fashion.

The Protocol states that a firm losing its registered rep still has the right to enforce any restrictive covenants in the defecting FA's employment agreement--such as clauses barring solicitation of clients, or recruitment of colleagues.  However, in my experience this carve-out in the Protocol is rarely resorted to, or applied by courts when spurned firms seek restraining orders.  Instead, most judges (and arbitrators) are persuaded that the firm-to-firm agreement of the Protocol takes precedence over provisions in particular brokers' employment agreements, and will permit departing reps to follow Protocol procedures in taking client information and soliciting customers even if their contacts have restrictive covenants.

So, how do you decide whether joining the Protocol makes sense for your firm?  It all depends on your business model and firm culture.  Is yours a shop that hires young FAs and gives them access to existing firm clients to service?  If so, joining the Protocol and making it easier for them to try to take those clients when they leave may not make sense.  By contrast, do you regularly recruit established advisors who join with their own client bases?  Then becoming part of the Protocol to make the recruitment process easier might make sense, particularly if your practice is growing, and you plan to try to add significant numbers of professionals to your ranks in the near future.

On the flip side, consider your departing reps: have you been losing personnel rapidly?  Is there a morale problem in the office, or economic difficulties that may be alienating FAs?  Then this might not be the right time to join the Protocol, particularly if your employment agreements with your advisors contain stringent non-competition clauses that might be found ineffective in the face of Protocol Membership.  Other factors to consider include how recently was your firm established: if it has a solid reputation in your community that can aid you in recruiting new personnel, or dissuade FAs from leaving, then becoming a Protocol Member might make sense.  By contrast, if your firm was only recently established and is still gaining its footing, consider carefully whether making it easier for registered reps to come and go makes sense at this particular juncture in your firm's business.  

In short, while registered representatives often give thought to whether the firm they're at, or the firm they're contemplating joining, is a member of the Protocol firms themselves also should carefully consider whether signing onto the Protocol aligns with their business strategy, goals and current situation.  And, for those firms that do join, they should calendar an annual review to assess whether Protocol membership continues to make sense.


Scott Matasar, a partner at Cleveland, Ohio-based Calfee, Halter, & Griswold LLP, regularly counsels brokers on the regulations and other legal issues surrounding a change of employment.  He also represents both corporate clients and individuals in all forms of securities litigation and regulatory matters, including customer arbitrations and enforcement/disciplinary proceedings brought by the SEC, FINRA and/or state securities regulators.  To learn more about Scott, please visit http://www.calfee.com/Scott_C__Matasar.bio




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