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What Transitioning Advisors Need to Know About Broker Protocol

Robert D. Conca, Esq.
08.26.2020

Jacko Law Group, PC (“JLG”) continues to see a high volume of financial advisors transitioning from one broker-dealer or registered investment advisory firm to another.  When advisors[1] change firms in the heavily-regulated financial industry, they and the firms they are joining must understand federal and state laws, as well as contractual limitations and how those considerations will factor in to the transition process.  It is imperative for both the onboarding firm and the transitioning advisor to pay close attention to rules and agreements that govern this area as well as any additional applicable restrictions to reduce risks and decrease the likelihood of potential liability. 

One factor that changes the manner in which the transition process can proceed is the Protocol for Broker Recruiting (“Broker Protocol”).  Created in 2004 by an agreement among three titans of the financial services industry, the Broker Protocol provides guidelines for certain – but not all – transitioning advisors.

This month’s legal risk management tip provides background relating to the Broker Protocol, describes when it applies to a transition and summarizes how to comply with its terms and requirements.[2]   

Background of the Broker Protocol

In August 2004, three wirehouses – Merrill Lynch, Price, Fenner & Smith Incorporated (“Merrill Lynch”), Citigroup Global Markets, Inc. (“Citi/Smith Barney”) and UBS Financial Services Inc. (“UBS”) (collectively, the “Founding Members”) entered into the Broker Protocol in an effort to minimize the litigation that was occurring among those firms when their advisors would transition from one firm to another.  Before the Broker Protocol was in place, it was common for advisor transitions to involve late afternoon resignation notice and a “race to the phones” during which the transitioning advisor would attempt to contact clients to recruit them to the new firm before their prior firm could make contact in an effort to retain those same client.  Attorneys were routinely involved to seek temporary restraining orders, author cease and deist letters and initiate litigation against the transitioning advisor and the onboarding firm (whether to allege breach of employment agreements, violation of trade secret obligations, or simply as a tactical step to chill client transition).  Rather than continue with expensive litigation efforts, the Founding Members elected to establish ground rules and simplify the transition process in an effort to reduce the consumption of both time and resources relating to advisor transition matters.       

Does the Broker Protocol Apply?

Over the past 16 years, the Broker Protocol has evolved and the parties that have become signatories expanded significantly.  Staring with just the three Founding Members, the Broker Protocol has become available to broker-dealers and registered investment advisors, large and small.  Firms are permitted to join or leave the Broker Protocol at any time – notably, early wirehouse Broker Protocol members Citi/ Smith Barney and UBS each have left as members. 

To become a member of Broker Protocol, firms need only sign a standard joinder agreement, and submit this to the administrator of the Broker Protocol.[3]  As of August 2020, there are more than 2,000 firms that are currently joined on as signatories.

In order for the Broker Protocol to apply to an advisor transition, both the advisor’s prior firm and new firm must be signatories at the time of the advisor’s transition.  As noted above, members can join and depart from the Broker Protocol at any time, so Broker Protocol membership is fluid.  It is critical for the advisor to be both departing from and entering into a new Broker Protocol member firm to help ensure that this requirement is met before an advisor can receive the protections and benefits of the Broker Protocol when changing companies.[4]

Properly Undergoing a Broker Protocol Transition

At its core, the Broker Protocol is an agreement among participants in the securities industry that governs the use of client data when advisors move between firms that are signatories to the Broker Protocol. The stated goal of the Broker Protocol is to further clients' interests of privacy and freedom of choice in connection with the movement of their advisors. It contains specific procedures for transitioning among its member firms and, sets forth limits on the client information that can be taken by the departing advisor to a new employer. Firms that become members of the Broker Protocol must agree to permit a transitioning advisor to take certain types of information relating to clients without facing the threat of litigation from the advisor's former company.

Certain criteria must be met to perform a valid transition under the Broker Protocol.  This includes:

  • the advisor's former and new firms need to be members of the Broker Protocol at the time of transition;
  • the advisor must provide detailed notice of the client information being taken in accordance with the Broker Protocol; and
  • the advisor and the new firm must strictly adhere to the Broker Protocol's restrictions regarding use of client information.

The Broker Protocol provides that only five items of client information may be taken by an advisor to their new firm: (1) client name, (2) client address, (3) client phone number, (4) client email address, and (5) account title of the clients that they serviced while at the firm (collectively, the “Protocol Information”).  Advisors are prohibiting from transferring any other information or documents to their new firm. 

In addition, if an advisor wishes to resign and adhere to the conditions of Broker Protocol, they will need to take the following steps:

  • Resignations will need to be in writing; and
  • Resignation correspondence must include a list of all Protocol Information to be transported to the new Broker Protocol Firm as well as a second list containing the client account numbers associated with the clients listed on the Protocol Information sheet.[5]

Once an advisor arrives at his/her new company, there are additional limitations required by the Broker Protocol.  To ensure compliance with applicable securities statutes and client privacy considerations, the onboarding firm is required to limit the use of the Protocol Information to the solicitation by the advisor of his or her former clients.  Notably, only the transitioning advisor is permitted to use of the Protocol Information or and such information may not be used for any other purpose. 

Failure to satisfy the requirements can lead the advisor and the advisor's new company directly into a litigation scenario.

Conclusion

Changing companies can be a challenging and effort-intensive process.  The applicability of the Broker Protocol can facilitate that transition process, so long as both the advisor and the new firm have a detailed understanding of what steps are - and are not - available to make the transition process as smooth and efficient as possible. 

JLG assists firms and individuals through the numerous complicated and nuanced considerations relating to investment adviser or registered representative transitions.  For more information on this topic or to find out about our services, please contact us at (619) 298-2880 or at info@jackolg.com.

Author: Robert D. Conca, Esq., Partner, Jacko Law Group, PC. Editor: Michelle Jacko, Esq., Managing Partner, Jacko Law Group, PC.  JLG works extensively with investment advisers, broker-dealers, investment companies, private equity and hedge funds, banks and corporate clients on securities and corporate counsel matters.  For more information, please visit https://www.jackolg.com/.

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[1] The term “advisor” used in this article refers to a transitioning registered representative or investment adviser representative.

[2] We have discussed in greater detail other transition considerations from both the onboarding firm’s and transitioning advisor’s perspective in JLG Risk Management Tips, available at https://www.jackolg.com/tip-What-To-Consider-When-Onboarding-New-Advisors and https://www.jackolg.com/tip-Strategic-Considerations-For-The-Transitioning-Advisor, respectively.

[3] The role of administrator has changes over the years.  As of the date of this article, the Broker Protocol is administered by Capital Forensics, Inc.  (see: https://www.capitalforensics.com/broker-protocol/).

[4] JLG has seen advisor contracts that restrict the clients that are subject to the protections of the Broker Protocol.  While outside the scope of this Risk Management Tip, this and other important issues should be considered by the transitioning advisor and their legal counsel (see, e.g., https://www.jackolg.com/tip-2020-Breakaway-101-FAQs-for-Transitioning-Advisors).   

[5] Notably, the advisor cannot retain the client account number details.

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