What is the broker protocol?
The Protocol for Broker Recruiting, usually called the broker protocol, is a private contract among financial firms, not a FINRA or SEC rule. It sets out what a registered representative or investment adviser representative may take, and what they must do, when leaving one signatory firm for another. In exchange, the firms agree not to sue each other or the advisor over the move if the terms are followed.
The agreement was first signed in 2004 by three firms: UBS, Citigroup's Smith Barney and Merrill Lynch, according to a May 2008 comment letter to the SEC from Wachtell, Lipton, Rosen & Katz, which said it acted as counsel in drafting and implementing the Protocol. The letter said the arrangement was meant to replace a pattern in which departing brokers took large amounts of customer information and their old firms sued, which in turn delayed account transfers and drew customer complaints.
The Protocol is now administered by J.S. Held, a consultancy that maintains the official list of signatories. This guide is general information, not legal advice; advisors considering a move should rely on the current Protocol text, their own agreements and counsel.
What information can an advisor take under the protocol?
Only basic contact information, and only for clients the advisor serviced at the old firm: the client's name, address, phone number, email address and account title, according to Kitces and other summaries of the Protocol. Account numbers, balances, holdings, statements, Social Security numbers and other documents are not covered. The 2008 Wachtell letter described the limit as the information necessary to contact the customer, and said the departing advisor is prohibited from taking any other documents or information.
Account details move only with the client's consent. If a client tells the new firm that they want account numbers or account information sent over, the client signs a standard authorization form and the old firm forwards the information, within one or two business days of receiving the signed form, according to the 2008 letter.
What does an advisor have to do to be protected?
The departing advisor resigns in writing and delivers the resignation to local branch management along with a copy of the client information being taken. Practitioner guides note that the list given to the old firm includes account numbers so the firm can identify the clients, even though the advisor may not take the numbers to the new firm.
Solicitation must wait. Under the Protocol, an advisor may contact former clients to ask them to move only after the advisor has actually joined the new firm. Kitces has noted that both firms must be signatories, and that the new firm should be on the member list by the time the advisor hands in the resignation letter.
If those terms are met, the Protocol generally bars litigation over the move. The Wachtell letter pointed to one carve-out: a firm can still sue over what the Protocol calls raiding, meaning a coordinated effort to poach its advisors. Teams and advisors in retirement or sunset programs are addressed by separate provisions.
Which firms are in the protocol and which have left?
Membership grew from three founding firms to 54 broker-dealers and investment advisers by May 2008, according to the Wachtell letter, and to more than 1,600 broker-dealers and RIAs by early 2018, ThinkAdvisor reported. The current list is maintained by J.S. Held and changes as firms join and withdraw, so advisors should check it before relying on the Protocol.
The biggest withdrawals came in late 2017. Morgan Stanley announced on Oct. 30, 2017 that it was leaving, saying the Protocol in its current state was no longer sustainable, according to WealthManagement.com and Financial Advisor magazine; it was the first of the large wirehouses to exit. UBS followed, telling advisors it would leave as of Dec. 1, 2017, WealthManagement.com reported. Citigroup said on Dec. 29, 2017 that it would exit effective Jan. 8, 2018, according to Bloomberg.
Merrill Lynch, a founding signatory, said in December 2017, days after UBS's departure, that it intended to remain in the Protocol, and Financial Advisor magazine reported at the time that the Protocol still counted Merrill and Wells Fargo Advisors among its members. Membership can change, so the current J.S. Held list is the authority on who is in.
Why did Morgan Stanley and UBS leave?
The firms framed the exits as a way to protect their investment in advisors and clients. Morgan Stanley said it would put more into retaining and supporting its existing advisors, and InvestmentNews characterized the move as Morgan Stanley waving the white flag on recruiting. InvestmentNews later described the withdrawals at Morgan Stanley and UBS as part of a broader strategy to reduce advisor attrition, alongside technology spending and retention-focused pay.
Leaving the Protocol did not stop departures. Morgan Stanley lost 47 brokers in the fourth quarter of 2017, the most of any quarter that year, InvestmentNews reported in January 2018, though the firm declined to say whether the exit and the departures were connected.
What happens when an advisor leaves a firm that is not in the protocol?
Without the Protocol's safe harbor, the move is governed by the advisor's employment agreement, any non-solicitation or confidentiality clauses, trade secret law and FINRA rules. The old firm may argue that client lists and contact information are its confidential property and seek to stop the advisor from soliciting clients.
The main tool is a temporary restraining order. FINRA Rule 13804 lets a party seek temporary injunctive relief in court; if a court issues a temporary injunctive order, a hearing before a three-arbitrator FINRA panel on permanent relief must begin within 15 days. Morgan Stanley used this route after its exit. AdvisorHub reported in January 2018 that a federal judge in Jacksonville, Fla., granted the firm an emergency order against a former advisor who had opened an independent firm two weeks earlier, at least the fourth restraining order Morgan Stanley had won since leaving; the firm had lost at least one other attempt.
Clients keep the right to move. FINRA Rule 2140 prohibits member firms and their associated persons from interfering with a customer's request to transfer an account in connection with a change in the customer's registered representative, including by seeking a court order that would bar or restrict a written transfer request, unless the account is subject to a lien for money owed or another bona fide claim.
Does the protocol apply to RIAs?
Yes, if they sign it. The Protocol has been open to registered investment advisers as well as broker-dealers since its early years; the 2008 Wachtell letter already counted both among the 54 signatories. Many breakaway RIAs join so that advisors they recruit from other signatories can bring client contact information, and so that their own departing advisors face predictable rules.
Joining is a two-way commitment. An RIA that signs the Protocol is bound by the same terms when its own advisors leave for another signatory, which is one reason some firms weigh whether membership still suits them as they grow. Our guide to breakaway advisors covers the broader mechanics of leaving a wirehouse.